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ACCOUNTING 



TITMAN'S ECONOMIC LIBRARY 



ACCOUNTING 



BY 

SIDNEY S. DAWSON, m.com., f.ca 

{Dawson, Chevalier <&- Graves, Liverpool) 

AND 

R. C. DE ZOUCHE, F.CA. 

{Wilson, de Zouche & Mackenzie, Liverpool) 



London : Sir Isaac Pitman & Sons, Ltd. 
Bath, Melbourne and New York 

/97^ 






W 



Printed by Sir Isaac Pitman 

& Sons, Ltd., London, Bath, 

Melbourne and New York 



^^ 



PREFACE 

In the preparation of the matter set out in succeeding pages, it 
has been assumed that the reader has a general knowledge of the 
theory of book-keeping, and the aim has been to submit, as an 
introduction to the practical application of the science of accounting, 
the general features of the more important sections of accounts to 
which that application may be directed. While this work goes 
beyond the purely elementary stage of the subject, it does not 
pretend to be exhaustive, and the practitioner desiring special 
knowledge, whether in relation to such duties as those of the 
Costs Accountant, Company Secretary or otherwise, will find 
advantage in reference to works dealing specifically and in greater 
detail with the problems of the particular branch of the subject 
in question. 

The matter of Income Tax, in view of probable legislative changes 
in the near future, has been omitted from this edition. 

The Authors. 



521751 

V 



CONTENTS 



PREFACE 

I. INTRODUCTORY 

II. ACCOUNTING RECORDS 

III. SINGLE ENTRY 

IV. STOCK AND STORES ACCOUNTS 
V. ANALYSIS OF TRANSACTIONS (l) . 

VI. ANALYSIS OF TRANSACTIONS (ll) 

VII. agents' ACCOUNTS 

VIII. CONSIGNMENT ACCOUNTS .... 

IX. DEPARTMENTAL ACCOUNTS .... 

X. BRANCH ACCOUNTS (l) 

XI. BRANCH ACCOUNTS (ll) 

XII. PARTNERSHIP ACCOUNTS .... 

XIII. EXECUTORSHIP ACCOUNTS .... 

XIV. COMPANY ACCOUNTS 

XV. STATEMENT OF AFFAIRS AND DEFICIENCY ACCOUNT 

XVI. COST ACCOUNTS 

XVII. SINGLE AND DOUBLE ACCOUNT 

XVIII. DEPRECIATION 

XIX. RESERVES AND RESERVE FUNDS AND SINKING FUNDS 

XX. MISCELLANEOUS 

INDEX 



V 

1 

11 

28 

38 

48 

57 

65 

70 

77 

84 

95 

102 

114 

131 

168 

204 

234 

248 

257 

267 

281 



Ytt 



ACCOUNTING 



CHAPTER I 

INTRODUCTORY 

The record of a series of transactions involving money or money's 
worth should be made in such manner as to render possible the 
ascertainment of the financial position arising from the dealings 
recorded, and of the profit or loss resulting therefrom. It must, 
therefore, be made on systematic principles, and in practice the 
method of book-keeping by double entry is that almost invariably 
adopted. 

It should be understood, however, that the ascertainment of a 
financial position, and/or of financial results, is not necessarily 
dependent upon any particular method of book-keeping; it is 
obviously facilitated thereby, but may be made from any records 
that are sufficiently exact. 

Double-entry Book-keeping. 

The system of book-keeping by double entry has the advantage 
over other methods of accounting that it seeks to record transac- 
tions as indicating transfers of value, thus affecting two accounts, 
that which, in a book-keeping sense, parts with, and that which 
receives, value. The term " transactions," however, must in this 
connection be taken to include, not only dealings that involve 
the physical transfer of value, whether of money or money's worth, 
but all circumstances which may effect a change in the financial 
position. It is thus taken to cover the variations, whether of 
gain or loss, in the values of assets (such, for instance, as the loss 
resulting from a bad debt), although the extent to which it may 
be necessary or prudent to have regard to such variations in strict 
and accurate accounting depends on the circumstances in which 
they arise. 

It is the chief advantage of this system of book-keeping that 
the principle of regarding each transaction as effecting a transfer 

1 



of value involves not merely a record of the assets and liabilities 
and of the variations in their worth, but also, concurrently, an 
analysis of the gains and losses resulting from the deaHngs entered 
into. 

Trial Balance. 

The method of double entry results in the construction of Ledger 
accounts which are summarised periodically in a Trial Balance. 
From this as a basis, the Profit and Loss Account and Balance 
Sheet can be prepared, but the Trial Balance is not necessarily 
a complete and accurate basis for this purpose. It may contain 
compensating errors, by which a mistake in one part of the double 
entry recording a transaction may be balanced by a mistake of 
similar amount in regard to another; it may record some transaction 
inaccurately; it may record others only partially, or not at all; and 
is not therefore to be regarded as more than prima facie evidence 
of the arithmetical accuracy of the entries in the Ledger accounts. 

Adjustment of Trial Balance. 

An accurate Balance Sheet can be drawn up from the figures 
contained in the Trial Balance only when the balances of assets 
and liabilities contained therein appear at fair values. Such adjust- 
ments of book values as this may render necessary will affect the 
Profit and Loss Account, and, when accurately made, will result 
in a balance upon this account, either of gain or of loss, which, when 
introduced into the Balance Sheet, will be found, if a profit, to 
represent the improvement in the surplus of assets over liabilities 
during the period covered by the account, or, if a loss, the amount 
by which the surplus has been reduced during that time. 

Profit and Loss Account and Balance Sheet. 

It is customary, when the Trial Balance has been prepared, to 
proceed concurrently with the preparation of both Profit and Loss 
Account and Balance Sheet. The Trial Balance, when first extracted, 
is seldom a complete statement of the exact amount of gains and 
losses or of the full and true values of assets and liabilities. It is, 
for example, necessary to consider whether full allowance has been 
made for all liabilities incurred, or in respect of assets, whether 
their value is fairly set out, or, a^ain, it may be essential to introduce 



INTRODUCTORY 3 

into 'the books the asset of stock-in-trade, and in other ways render 
the accounts contained in the books complete. 

As the result of these adjustments, the Balance Sheet, which is 
a summary of such items in the Trial Balance as are not gains and 
losses and as are, therefore, to be included in the Profit and Loss 
Account, is eventually brought to represent a true view of the 
financial position, and to disclose the true amount of the surplus 
of assets over liabiHties, constituting the interest of the proprietors 
of the business in the form of capital and accumulated profits. By 
comparison of this surplus with that shown in any previous Balance 
Sheet, the improvement made in the intervening period may be 
calculated. 

It is, therefore, from the Balance Sheet that the amount of the 
profits earned is to be ascertained. The Profit and Loss Account 
demonstrates how the amount has arisen, but cannot be completed 
until the Balance Sheet itself is accurately drawn up. 

Illustration. 

In illustration, there may be taken the instance of a sole trader 
who, upon the preparation of a statement of his financial position 
in relation to his business as at the 31st December, finds that the 
surplus of assets over liabilities at that date, in other words, his 
capital, is £1,400. A similar statement as at 31st December of 
the previous year disclosed a surplus of £1,200. The improvement 
during the year under review has, therefore, been £200. The trader 
has withdrawn from the business during the period the sum of £300, 
and but for this the gain would have been £500, which is the amount 
of the profit made. 

The Profit and Loss Account will provide an analysis of the various 
forms of gains and losses resulting in the net balance of profit of 
£500, but the ascertainment of this figure is dependent on the 
preparation of an accurate Balance Sheet. 

Definition and Purpose of Balance Sheet. 

A Balance Sheet is not a statement of assets and Habilities merely, 
but a summary of all balances remaining open in the books after 
the nominal accounts have been closed by transfer to Profit and 
Loss Account. It is a statement showing the financial position of 
a proprietor in relation to his business as at a particular date, IX 



4 ACCOUNTING 

differs from the form of financial document known as a " Statement 
of Affairs " in that the latter is usually compiled to show the finan- 
cial position of an individual in relation to his creditors. This is 
seldom a summary of balances as they actually appear in the books, 
but rather a schedule of assets at their actual or estimated realisable 
values and of the liabiHties due to outside persons. 

Being a summary of balances and not merely a statement of assets 
and liabilities, a Balance Sheet may contain items of " assets '* 
which are not realisable and credit balances which are not 
liabilities due to be discharged. For example, the Balance Sheet 
of a limited company may include on the side containing the 
liabilities the item " Premium on Shares," representing merely an 
amount received from shareholders in respect of which there is a 
liability to account; on the Contra side there might appear the 
item " Rent paid in advance," which, while not convertible into 
cash at the date of the Balance Sheet, may be correctly so treated. 
It is ordinarily designed to show the financial position as of a going 
concern and, therefore, in the majority of cases contains estimates 
of values, more particularly of assets. The manager or proprietors 
of a business, whether trading or non-trading, must frequently 
incur expenditure that is not represented in any reahsable form, 
but which may nevertheless possess substantial value and be dealt 
with accordingly in the accounts and also in the Balance Sheets 
periodically prepared therefrom. The outlay incurred in advertis- 
ing a proprietary article with a view to the creation of a trading 
connection is an example, and may, consistently with strict and 
accurate accounting, be spread over a more extended term than, 
say, the expense of ordinary advertising incurred regularly in the 
maintenance of a goodwill already acquired. 

It is difficult to state definite principles in this connection, but 
it may be said that the justification for spreading expenditure over 
a term of years will be found in the facts either — 

(1) That later years will derive direct benefit from the outlay in 
question, or, 

(2) That later years are saved some charge by reason of the 
expense already incurred. 

Capital and Revenue Expenditure. 

In the preparation of a Balance Sheet and Profit and Loss Account, 



INTRODUCTORY 5 

the distinction between Capital and Revenue Expenditure is of 
importance. 

The former includes value expended upon such assets (known as 
Fixed Assets) as are acquired, not primarily for re-sale in the 
ordinary course of the operations of the business, but for reproduc- 
tion of value. Examples of this class of asset are the first cost 
of a ship owned by a single ship company, the permanent way, 
stations and land of a railway company, the plant and machinery 
attached to a business. 

Such expenditure may not always possess realisable value 
equivalent to its original cost. It may fluctuate from time to time 
and may suffer depreciation in the ordinary course of the trading 
operations. In a later chapter consideration is given, more particu- 
larly in regard to Limited Companies, to the necessity in accounting 
to have regard to such variations in value. It is clear, however, 
that, as to certain items included under the term ** Fixed Assets " 
— Plant and Machinery, for example — ^their worth is consumed in 
the processes incidental to production. It is necessary if the 
business is to continue that they shall eventually be replaced, and 
the profit resulting from their use cannot be said to be fairly 
estimated until such depreciation has been allowed for. 

The term " Floating or Circulating Assets *' is applied to such 
items as Cash, Stock, Book Debts, etc., which change their form in 
the course of the daily transactions of a business. These form the 
" working capital " and are in total usually somewhat larger than 
the excess of Shareholders' or Proprietors' Capital over the Fixed 
Assets, by reason of the additional value received by the business 
from creditors whose claims are undischarged. 

The value of Circulating Assets is dependent on realisation, and, 
inasmuch as they will necessarily be realised in the due course of 
trading operations, any loss which may then arise affects 
Revenue. In the preparation of a Balance Sheet, therefore, it is 
customary, and, for purposes of accurate accounting, necessary, to 
value such items at the figure they may be expected to produce 
and, consequently, where this is less than cost, to allow for any loss 
anticipated. It might, in theory, be thought permissible to take 
credit for any gain over and above cost in regard to such 
assets prior to reaHsation {e.g., in regard to Stock), but, as the 
function of a trading business is to enter into transactions involving 



6 ACCOUNTING 

sales and conversions of such assets, by which alone such profits 
can be made certain, it is thought more prudent and more accurate 
to take account of such gains only as and when reahsed. 

To the foregoing classification of Fixed and Circulating Assets 
may be added that of Terminable (sometimes called " Wasting ") 
Assets, representing the interest, limited in point of time, in value 
spent upon Leases, Patents, Copyrights, etc. The worth of the 
capital expended in this form is obviously determined by some 
definite period, and in the preparation of a Balance Sheet and Profit 
and Loss Account, the original value is usually taken to be consumed 
proportionately to the benefit derived from their ownership over the 
period represented by the interest held. 

Forms of Balance Sheets. 

It is customary to prepare periodically summarised statements 
of the financial position and results of a business. The usual form 
of such statements is that of the Balance Sheet and Profit and 
Loss Account. 

The Balance Sheet, as already stated, is a summary of the 
balances remaining open in the books after the nominal accounts 
have been closed by transfer to Profit and Loss Account, classified 
in such a way that the financial position may be ascertained there- 
from. It is prepared according to one or other of the methods known 
as Single and Double Account respectively. Under the former, 
the Balance Sheet is presented in the form of one compre- 
hensive statement, whereas, in the latter, it is divided into 
two parts. 

Under Double Account, the first section shows, on the one hand, 
the expenditure on all fixed and permanent assets of the under- 
taking, and, on the other hand, the Share and other Capital raised 
for the purposes of the concern; while the second, into which are 
introduced the totals of Capital Expenditure and Receipts, or the 
balance thereof, as shown by the first part, includes all floating 
assets and liabilities of the business. 

The Double Account form of Balance Sheet is used chiefly in 
connection with such undertakings as railways, canals, water- 
works, etc., which expend much of their capital upon fixed assets 
intended, not for re-sale, but to be retained permanently for the 
purposes of the business, and able to be maintained in such 



INTRODUCTORY 7 

efficiency as to possess a continuing value for revenue-earning 
purposes. 

It is sometimes contended that there is a distinction in principle 
in the matter of the treatment in accounting of depreciation in 
respect of the fixed assets subject thereto, as between those concerns 
to which the " Single " and " Double " forms of account are 
respectively appUcable. The matter is considered in Chapter XVII. 

In preparing the Balance Sheet in Single Account form it is 
customary to set out the balances entering into it in representative 
totals in such manner that the general financial position can be 
seen. 

The usual order of the items is as follows — 

Debit Side of Balance Sheet. 

Share Capital, or Proprietors' Capital. 

Liabilities for loans borrowed for long periods on security, 

e.g., debentures. 
Sundry Creditors in respect of Trade and other accounts. 
Loans for short-terms, such as a bank overdraft. 
Shareholders' Dividends outstanding. 
Contingent LiabiHties. 
Reserve Funds, General Reserves, and undivided profits. 

Credit Side of Balance Sheet. 

The general order of arrangement in respect of debit balances 
is to set out at the head the assets least easily realised, thus 
commencing with the fixed assets, as follows — 

Goodwill. 

Freehold land and buildings thereon. 

Leasehold land and buildings thereon. 

Plant and Machinery. 

Office Furniture and Fittings. 

Gilt-edged Securities. 

Other Investments. 

Stock-in-Trade. 

Work in Progress. 

Sundry Debtors on Trade Account. 

Bills Receivable. 



8 ACCOUNTING 

Agents' Balances. 

Balance at Bankers. 

Cash in hand. 

Proportions of Rent and similar items paid in advance. 

Expenditure spread over a term of years. 

Revenue Account. 

The Profit and Loss Account is also termed Revenue Account or 
Income and Expenditure Account, the last-named being appUed 
usually to a statement showing the result of transactions of a non- 
trading character, such as those of, say, a landed proprietor, or 
of a hospital or a similar institution, the operations of which are 
not primarily undertaken with a view to profit. 

When the Profit and Loss, or similar. Account expresses the result 
of trading transactions — taking the word " trading " in a wide sense 
to include all business operations entered into with a view to the 
earning of profit — it is usual to prepare it in such manner as to dis- 
tinguish the gross from the net profit. This is accomplished by the 
inclusion in a separate account of all items entering into the 
earning of the gross profit and by carrying the balance of this 
statement to the Profit and Loss Account, in which the additional 
items of loss or gain will be charged or credited. 

This additional account is variously named according to the 
nature of the business, but is usually termed Trading, Manufacturing 
or Revenue (as distinct from Net Revenue) Account; while in par- 
ticular businesses it may be given other titles, such as Stock or Goods 
Account, Contracts Account (for building or other contractors). 
Voyages Account (for steamship companies), etc. 

The distinction between the account showing the gross, and that 
showing the net, profit, is that the former is so constructed as to 
show the surplus of revenue earned or sales made over the value 
consumed or outlay directly incurred in respect of the amount 
earned in the course of trading, while in the latter will be shown all 
other expenses and income. 

The account showing the gross profit may be merely a statement 
of purchases and sales of some class of goods which undergo no 
change of form, such as those dealt in by a General Merchant, and 
will then, with due adjustment for the value of stocks on hand at 
the beginning and end of the trading period, give as the gross profit 
the difference between the total sales m,ade and the cost price of the 



INTRODUCTORY 9 

goods sold, less any deterioration allowed for in respect of stocks 
unsold. 

When the nature of the business operations involve some process 
of manufacture or production, the account, in these circumstances 
more usually termed Manufacturing Account, records the results 
of the sales of the product as compared with the cost directly 
incurred in the production. Such cost will be represented largely 
by the value of raw materials consumed, and by labour. 

Departmental Accounts. 

In the chapter entitled " Departmental Accounts " a method is 
shown by which the balance, whether profit or loss, resulting from 
the trading or manufacturing operations of a particular section of 
the business may be ascertained. In similar manner accounts 
may be raised to show the outcome of a particular venture or of 
any limited set of transactions. Examples are to be found in the 
system for Voyages Accounts of a Shipping Company, the Contract 
Accounts of a building contractor, and the Consignment Accounts 
of a merchant, all of which have a general analogy with 
Departmental Accounts. 

Receipts and Payments Account. 

It may occasionally occur that a Receipts and Payments Account 
is submitted in place of a Profit and Loss Account. It is obvious 
that where cash receipts are identical in total with revenue earned, 
and cash payments with expenditure incurred, a comparison of the 
balance of cash in hand at the end of the period to which the 
account relates with that at the beginning will disclose the amount 
of profit or loss made. These circumstances can but rarely arise. 
As a rule a Receipts and Payments Account is merely a record of 
dealings in the form of cash. Such transactions may be, on the 
one hand, receipts of Capitcil, or realisations of assets, or, on the 
other hand, the discharge of liabilities or the acquisition of assets 
for re-sale or otherwise. The debts realised and liabilities discharged 
may have been created by the trading operations of an earlier period. 
Under the system of book-keeping by double entry, such transac- 
tions would be recorded as sales and purchases when they occurred. 
The fact that they become represented in the cash receipts and/or 
payments involves merely a change in the form of the assets and 

2— (1377) 



10 ACCOUNTING 

liabilities of the business, but does not, per se, affect the trading 
results in profit or loss. The Profit and Loss Account will include 
all revenue attributable to a particular period whether received 
or not, and, on the other hand, the full amount of expenditure 
relating to the period, whether discharged or outstanding. 



CHAPTER II 

ACCOUNTING RECORDS 

A KNOWLEDGE of the general principles of the method of book- 
keeping by double entry has been assumed, but it is thought 
desirable to consider the more important methods of record and 
organisation by which, where applied to any considerable volume 
of transactions, this system may be facilitated. 

Internal Check. 

In order that books of account may furnish to the fullest extent 
the advantages of a system of book-keeping it is essential that the 
entries contained therein should form an accurate record, and it is 
therefore of importance that they should, where possible, be verified 
by some system of internal check. To secure this, the accounting 
organisation should be so designed that every entry is brought under 
the review of someone other than the person originally responsible 
for it. This will not only provide a verification, but render fraud, 
except by collusion, less easily possible. 

An adequate system of internal check must be both simple and 
effective, but the exact nature of the transactions to be recorded, 
and the number of the staff by which it is to be operated are factors 
to be taken into account in considering how it should be applied, 
and render it impossible to set out in express terms rules of universal 
application. The following, however, are some of the more 
important points to be observed, where circumstances permit — 

(1) Clerks concerned in the record of cash transactions should 
not have control of Ledger accounts. 

(2) Where possible, the payment and receipt of cash should 
be placed in different hands. 

(3) The Petty Cash Book should be on the " Imprest " system. 

(4) Cash should be balanced daily, and the Bank Account 
reconciled with the Bank Pass Book at frequent intervals. A 
record should be kept of such balances and reconciliations. 

(5) Payments of accounts owing should be authorised and 

11 



12 ACCOUNTING 

in regard to invoices for goods, etc., supplied, all particulars of 
quantity, description and price should be approved, and receipt 
of the goods duly verified before payment. 

(6) Acceptance of orders received should be subject to super- 
vision and goods in fulfilment thereof be delivered only on express 
instructions. 

(7) Allowances for returned goods, claims and overcharges, 
etc., placed to customers' credits, should be approved. 

(8) Adequate records of the receipt and delivery of goods 
should be made, and all receipts and deliveries advised to the 
counting-house daily. 

(9) Complete Stock Accounts should be kept. 

(10) The Debtors Ledger should be brought periodically under 
the inspection of a manager, or responsible person, to ensure 
proper care in the collection of amounts outstanding. 

(11) Statements of debtors' accounts, and requests for payment 
of accounts overdue, should be made out and despatched by 
someone other than the cashier or Ledger clerk. 

(12) All Ledgers should be controlled by Adjustment Accounts, 
on what is commonly termed the '* self -balancing " system. 

(13) The arithmetical accuracy of the books should be verified 
frequently by the checking of all postings and extraction of a 
Trial Balance. 

Journal. 

The method of book-keeping by double entry necessarily involves 
the use of the Journal and Ledger, and all systems of accounting 
are founded upon these books, with such modifications and develop- 
ments as may seem desirable in any particular case. In practice, 
of course, the Ledger Cash Account is almost invariably recorded 
In a separate Cash Book, and maintained as a primary book, or 
book of first entry, in addition to the Journal. 

For purposes of introduction to other branches of accounting, 
it is convenient to consider the usual arrangement and subdivision 
of the three books named. It is not possible to set out in detail all 
the numerous types of books which might be used in particular 
circumstances, and the endeavour has been made to indicate 
those only which are commonly used in connection with a trading 
or manufacturing concern. 



ACCOUNTING RECORDS 13 

The Journal is commonly divided into the following sections — 

Sales 

Purchases or Invoices 

Returns Inwards and Allowances 

Returns Outwards 

General or Ordinary. 

The first four of these, by reason of their being devoted each to 
the record of one general type of transaction, permit of the posting 
of periodical totals, and have the further advantage that they 
enable a record to be kept of particulars of quantities and of goods 
dealt in in a more systematic manner than would be possible 
were all entries made in one General Journal. 

The main General Journal is sometimes used to record only such 
transactions as are unsuitable to be entered into any other Journal, 
but it is not unusual to find that the monthly or periodical totals of 
the subsidiary books are introduced into the principal Journal and 
posted therefrom to the nominal accounts affected. 

The use of these subsidiary books to some extent lessens the 
value of the main Journal as a chronological record of transactions, 
but, in practice, it is found that the classification of entries which 
the subsidiary books afford, not only furnishes in convenient 
form information as to the general nature of the transactions 
recorded, but enables the accounting organisation to be more 
efficiently carried out. 

Cash Books. 

The transactions in cash are frequently contained in more than 
one book, and the Cash Book is commonly subdivided into some 
or all of the following — 

Cash Sales 

Sales or Customers' Cash 
Trade Payments 
Petty Cash. 

Each of these books is subsidiary to the General Cash Book, and 
the first three are incorporated in the main Cash Book in 
periodical totals. 

Petty Cash Book. 

As regards the Petty Cash Book, this may be operated as a 



14 ACCOUNTING 

separate account of cash, sums being placed periodically with the 
petty cashier for disbursement in the manner hereafter explained, 
or upon the " Imprest " system, in which case the petty cash 
disbursements are introduced into the General Cash Book in 
totals. 

Cash Sales Book. 

The Cash Sales Book, as its name implies, records all receipts 
in the form of cash sales. Such items may be numerous and are 
frequently of small amount; moreover they involve no entry upon 
the personal accounts, and in these circumstances the record of 
such transactions is conveniently made in a subsidiary book from 
which the daily totals may be carried to the General Cash Book. 
By the provision of a special column in the latter book, the posting 
of the amounts of cash sales to the nominal account may be made 
in monthly totals. 

Customers* Cash Book. 

The Sales or Customers' Cash Book is used to record cash receipts 
from customers in respect of credit sales. All entries of this nature 
affect the accounts of debtors, and by reason of their being con- 
centrated in one book are posted to the Ledger accounts of customers 
with greater facility than if they were recorded only in the General 
Cash Book, for this must necessarily contain also numerous entries 
of transactions of different nature. The Sales or Customers' Cash 
Book is of special advantage in connection with sectional 
balancing. 

Trade Payments Book. 

The Trade Payments Book is generally used to record payments 
made to creditors for goods supplied or value received in respect 
of the trading or manufacturing operations of the business. Such 
payments may be made by cheque or partly by cheque and partly 
by cash, being incorporated accordingly in the General Cash Book 
in periodical totals. 

Just as the Sales Cash Book entries affected the Debtors' Accounts* 
the Trade Payments Book entries should be such as invariably 
concern the Creditors' Ledger. It gives similar advantages in 
convenience and saving of time. 



ACCOUNTING RECORDS 15 

It is obvious that the Cash Sales, Sales Cash, and Trade Payments 
Books form part of the General Cash Book, and when duly incor- 
porated therein, in total constitute the last-named book a record of 
the total cash receipts and payments. When once the totals are 
recorded therein, the subsidiary books become memoranda of 
transactions by which Cash Account has been affected. 

Petty Cash. 

As already stated, the Petty Cash Book may be operated as if a 
distinct Ledger account, or as a subsidiary part of the General Cash 
Book upon the " Imprest " system. 

Under the former method, amounts are paid from the General 
Cash to Petty Cash as required for disbursements and entered 
accordingly in the books concerned. As payments are made from 
the Petty Cash, they will be recorded in the usual manner, and posted 
to the debit of the nominal accounts affected. To save some part 
of the time involved in posting many items of small amount, it is 
customary to use a Petty Cash Book with analysis columns, into 
which the various items paid may be extended from the Total 
column, thus enabling entries to be made to the nominal accounts 
of totals. 

The operation of the Petty Cash Book in this form treats the 
Petty Cash as an integral part of the system of book-keeping, and 
the balance in hand from time to time must be brought into any 
Trial Balance extracted. 

The alternative method, known as the " Imprest " system, 
has the effect of treating the Petty Cash Book as an interim 
record, to be incorporated in the General Cash Book in due 
course. 

Under this system, a definite sum, estimated to cover the average 
disbursements through Petty Cash for (say) one month, is placed 
with the Petty Cashier. This amount is duly entered in the General 
Cash as a payment and debited in the General Ledger to Petty Cash 
Account. The Petty Cash records are made in the manner already 
described. At the end of the month or other period, for the dis- 
bursements of which the fixed amount has been placed with the 
Petty Cashier, a cheque is drawn for the actual payments made, 
and entered in the General Cash Book. The entry will be made in 
such manner that the various nominal accounts may be correctly 



16 ACCOUNTING 

charged according to the particulars of the actual payments shown 
by the totals of the analysis column of the Petty Cash Book. The 
receipt by the Petty Cashier of a cheque equivalent to the disburse- 
ments will restore the balance of cash in his hands to the original 
figure, and this process will be repeated from month to month. 

Under the " Imprest " system, the Petty Cash Book is operated 
so far as the general system of book-keeping is concerned as a 
memorandum, the only entries relating to Petty Cash which affect 
Ledger accounts being those made in the General Cash Book. Under 
the alternative system, direct posting is made from the credit side 
of the Petty Cash Book to the nominal accounts, and the balance 
of the Petty Cash in hand enters into the Trial Balance. 

General Cash Book. 

The form of the General Cash Book varies. It may be merely 
a record of transactions in cash, or may be so operated as to contain 
the Ledger Bank Account. It will in these circumstances show the 
balances of both Cash and Bank Accounts. 

When the Cash Book contains the Cash Account only, it is usual 
to make it inclusive of bank transactions as an alternative to their 
journalisation by entering cheques drawn as receipts by cash from 
the Bank Account, and to record their payment in the ordinary way; 
and as regards payments into the bank, to enter all cheques and 
other sums received as cash receipts in the first place, clearing the 
Cash Book by a record of the payment to the bank. 

Under this system, each entry made in respect of cheques drawn, 
and for moneys banked, affects the Bank Account in the Ledger, 
and must be posted thereto from the Cash Book. For this purpose, 
the use of special columns for cheques drawn on the debit side of 
the Cash Book, and for payments in, on the credit side, into which 
the money value of such transactions of this kind will be entered 
in the first place, enables the totals of such entries to be ascertained. 
These may thus be extended into the principal cash column and 
posted in total periodically. 

When the Cash Book is so arranged as to contain bank transac- 
tions in the form of a Ledger account — the Bank Account being 
regarded simply as an additional account of cash — each cheque 
drawn will be entered in the " Bank '* column on the credit side as 
a direct payment from the bank. Similarly amounts received and 



ACCOUNTING RECORDS 17 

banked may be treated as being received by the Bank Account, or 
where entered in the cash column in the first place may subsequently 
be recorded as paid by " Cash " and received by " Bank," thus 
appearing on both sides. The operation of the Cash Book under 
these two methods is shown on pages 18 and 19. 

Ledger. 

The Ledger accounts, when numerous, may be contained in a 
number of books, classified and arranged according to convenience. 
It is usual to arrange the Ledgers as between Debtors, Creditors, 
General and Private, with such number for each group as the 
circumstances may suggest, but there may, of course, in particular 
businesses be distinct Ledgers for any special classes of accounts. 
In the Ledgers themselves, the accounts may be grouped according 
to any method desired. The Debtors' Ledgers, for example, might 
be arranged alphabetically or geographically, or the accounts 
affecting a particular agent or traveller be placed together in one 
section, or such other arrangement adopted as may be advantageous 
in any particular case. 

In Chapter V the classification of the entries in the primary 
books with a view to the ascertainment of the total of the 
transactions affecting any particular Ledger, or group of Ledgers, 
is dealt with. 

"Slip *' System. 

Reference has been made to the advantages obtained in the 
adoption of a system of internal check. Errors of commission may 
arise either in writing up the primary books or in posting therefrom 
to the Ledger Accounts. The risk of mistake cannot be entirely 
eliminated, but may be minimised by so arranging the system of 
accounts as to make all entries, as far as possible, direct from 
original records, upon the " Slip " or " Card " system. 

The principle involved may be illustrated by an example in 
relation to the accounts of a bank. In this case, the Receiving 
Cashier obtains, with each deposit, a slip showing details of the 
total amount banked. From this he records in his Receiving Cash 
Book the amount of coin and Bank of England Notes received and 
retained by him. The slip is then passed (with the cheques included 
in the total of the deposit, attached thereto) to the clerk in charge 



IS 



ACCOUNTING 

CASH BOOK. IN FORM SHOWING 









Discount. 


Bank. 


Cash. 


1919. 






£ 


s. 


d. 


{, 


s. 


d. 


£ 


s. 


d. 


Jan. 1 


To Balances 


V 








142 


10 


- 


21 


7 


6 


2 


„ Bank . 


V 














42 


- 


- 


3 


„ Henry Young 


22 


1 


14 


8 








116 


- 


- 


n 


„ A. Robinson . 
„ Cash . 


36 

V 




18 


8 


200 


3 




84 


3 


— 


5 


„ J. Samuels 


80 




5 


- 








16 


_ 


— 


8 


„ J. Williams . 


54 




13 


- 


52 


7 


- 








9 


„ Bank . 


V 














34 




_ 


10 


.. W. Roberts . 


29 




12 


_ 








4318 


_ 




„ B. Cook 


32 




17 


— 








24 


3 


_ 


» 


„ Cash . 


V 

P.L. 








78 


1 


- 










5 


- 


4 


473 1 - 


381 


iile 


Jan. 10 


To Balances 










380 


11 


_ 


14 


12 


6 



CASH BOOK, OPERATED 









Discount. 


Bank. 


Cash. 


1919. 






£ 


s. 


d. 


£ 


s. 


d. 


£ 


5. 


d. 


Jan. 1 


To Balance 


V 














21 


7 


6 


2 


„ Bank . 


V 
V 








42 
16 


10 


- 








3 


„ Henry Young 


22 


1 


14 


8 








116 


- 


- 


j^ 


„ A. Robinson . 


36 




18 


8 








84 


3 


— 


5 


„ J. Samuels 


80 




5 


_ 








16 


- 


_ 


8 


„ J.Williams . 


54 




13 


_ 








52 


7 


_ 


9 


„ Bank . 


V 








34 


_ 


- 








10 


„ W. Roberts . 


29 




12 


_ 








43 


18 


_ 


" 


„ B.Cook 


32 
P.L. 




17 


- 








24 


3 


- 




„ Bank {for period) . 


60 














92 


10 


















P.L. 
110 

V 






















To Balance 


5 


- 


4 








450 


8 


6 


*> 








1412 


6 



ACCOUNTING RECORDS 
BALANCES OF BANK AND CASH ACCOUNTS. 



19 









Discount. 


Bank. 


Cash. 


1919. 






i 


s. 


d. 


i 


s. 


d. 


i 


s. 


d. 


Jan. 2 


By Cash 


p1 

120 








42 


- 


- 










„ Wages . 














36 


5 


— 






P.C.B. 




















„ 


„ Petty Cash . 


12 














5 




- 


„ 


„ John Jones . 


42 


1 


4 


6 


16 


10 


- 








3 


.. Bank . 


p1 










' 




200 


3 


— 


6 


„ TravelUng Expenses 


80 














10 




- 


9 


,. Cash . 
,, Wages . 
„ Petty Cash . 


V 

P.L. 

120 

P.C.B. 

13 








34 






32 
5 


10 


- 


10 


„ Bank . 


1 














78 


1 


— 


" 


„ Balances 


P.L. 
110 








380 


11 


- 


14 


12 


6 






1 


4 


6 


473 


1 


- 


381 


11 


6 



























AS A CASH ACCOUNT ONLY. 









Discount. 


Bank. 

1 


Cash. 


1919. 




P.L. 


i 


s. 


d. 


/; 


s. 


d. 


/: 


s. 


d. 


Jan. 2 


By Wages . 


120 
P.C.B. 














36 


5 


- 


II 


„ Petty Cash . 
„ John Jones . 


12 
42 


1 


4 


6 








5 
16 


10 


- 


3 


„ Bank' . . . 


V 

P.L. 








200 


3 


- 








6 
8 


„ Travelling Expenses 
„ Bank . 


80 

V 

P.L. 








52 


7 


- 


10 






9 


„ Wages . 


120 
P.C.B. 














32 


10 


- 


lb 


„ Petty Cash . 
„ Bank . 

,, Bank (for period) . 
„ Balance 


13 

V 

P.L. 
60 

V 








78 


• 


- 


5 

330 
14 


11 
12 




" 








6 






P.L. 
110 
























1 


4 


6 








450 


8 


6 








^ 






■^ 



20 ACCOUNTING 

of the Received Waste Book, where the total amount is classified 
according to the nature of the cheques, cash, etc., included therein, 
under such headings as House (representing cheques on the bank 
itself). Branches, Town Clearing, Country Clearing, Cash, etc. The 
total of the transactions in the form of deposits is thus analysed. 
It is necessary, however, that the customer be credited with the 
amount paid in and this is accomplished by transfer of the slips 
to the clerk in charge of the Current Accounts Ledgers concerned, 
who will make entries upon the Ledger accounts therefrom. The 
slip has thus served as a basis for the entries in the — 
Received Cash Book, 
Received Waste Book, 
Current Accounts Ledgers; 
and may even be of further use in writing up the customer's 
Pass Books. In a fully-developed system of accounting, it is also 
used as the basis for entry in what is termed the Check Ledger 
Credits Book, by means of which the analysis of credits under 
the headings of the Ledgers affected may be obtained for the 
purposes of sectional balancing. 

It is obvious that tests will be necessary to prove the accuracy 
of the entries made, but error is clearly less likely to occur where 
each successive step in the book-keeping is made from some original 
record. 

The extent to which this method may be adopted to serve the 
purposes of the more detailed system by which all entries to Ledger 
accounts are made only by direct posting from primary books, 
depends entirely on the nature of the transactions to be recorded. 

It is obvious that a Journal entry, recording a transfer of value 
as between two accounts, has fulfilled its purpose when the entries 
have been posted. It continues of value only as a record of the 
particulars of the transaction by which the Ledger accounts have 
been affected. 

The use of a bound book may retain this record in a form less 
likely to be lost, but it is possible that with proper care the same 
results might be obtained from entries contained on loose sHps, 
arranged, when they have served their immediate purpose as the 
basis of Ledger entries, in such form as may be found convenient. 

Similar arguments may exist with regard to Ledger accounts. 
The nature of the business may involve single transactions upon 



ACCOUNTING RECORDS 21 

numerous personal accounts, and in respect of these a record may 
be important only until such time as they are paid. The record 
in such circumstances may possibly be made with more convenience 
and equal effect in some form less permanent than that of entries 
in the ordinary type of bound Ledger. 

In illustration of these preliminary observations, the form and 
method of " Slip " and " Card " records are now further considered. 

Slip Day Books. 

The use of a carbon duphcate Sales Invoice Book may make 
it unnecessary to write up the Sales Day Book with particulars 
other than the number of the invoice, the name of the customer, 
and the total amount, which may be classified in analysis columns 
in such manner as may be thought desirable. 

The postings to the Ledger accounts are usually made from the 
Sales Day Book, but may be made from the carbon duplicates 
themselves, the Sales Day Book then forming a mere summary of 
the amounts of the invoices and giving the total to be posted to the 
nominal account. 

This latter course has the advantages that the time taken in 
writing up the Sales Day Book is largely saved, and the risk of error 
in making the entries in the Ledgers by repetition of mistakes in 
the primary book is minimised. 

The use of the Sales Day Book as a summary does not, however, 
eliminate the risk of error in the record of the totals of the various 
invoices in this Journal, with the possible result that the total given 
as the amount to be credited to Sales Account may not be the 
equivalent of the debits entered upon the personal accounts. 

This difficulty may be avoided by the use of a special form of 
Sales Invoice Book, which contains a wide non-detachable margin 
between the binding and the perforation along that copy of the 
invoice which is torn out and despatched to the customer. This 
space may be filled in with the total of the invoices. 

The adoption of an Invoice Book containing three or four, or 
even more forms on each page, will enable a similar number of 
marginal amounts to be recorded. The latter may then be totalled 
from page to page, and the gross amount to be credited to Sales 
Account thus ascertained. 

The further extension of the Slip system in the manner described 



22 ACCOUNTING 

dispenses entirely with the Sales Day Book, but is in one respect 
hardly so convenient, for it involves summarising and carrying 
forward from page to page the totals of a comparatively small 
number of entries on each. It has also the more serious drawback 
Ihat the space available for the record of totals seldom admits of 
classification of the sales, either according to their nature, or 
according to the Ledgers affected, the latter form of analysis being 
(as explained hereafter) of great importance in connection with the 
sectional balancing of the Ledgers. Where the " Slip " system is 
adopted in regard to sales, it is of importance to see that all the 
consecutive number of invoices are accounted for. 

Invo'ces made out should naturally agree with the terms of the 
customer's order, and the system may be adapted to provide that 
a slip, containing the particulars of the order, made out at the time 
of its receipt, and subsequently filled in with the full record of 
everything incidental to its due execution, forms the actual entry 
in the Sales Day Book. In these circumstances, however, the 
invoice sent to the purchaser is made up from the particulars 
contained in the Day Book, in reverse of the usual procedure. 

The alternative method indicated is operated on the following 
general lines. The orders as received are recorded in an Orders 
Received Book. Instructions as to execution thereof are entered 
on slips, made out in duphcate and containing full par- 
ticulars. One slip relating to each order may be passed to the 
Factory Manager, who will summarise its contents in a Factory 
Orders Book, and either be transferred by him to the foreman 
entrusted with the actual work relative to execut on, or retained 
as a record of goods to be supplied or work to be done. Upon 
completion of the instructions the slip will be returned to the 
office or counting house, which will at the same time be duly advised 
that the order has been fulfilled, and which will give the further 
instructions necessary for despatch of the goods. The shp when 
returned will contain a full history of the execution of the order 
given, evidenced by the initials of all persons concerned. It may 
then be priced out at the values applicable to the goods included 
and posted in a Sales Day Book (in the form of an Invoice or 
Voucher Guard Book), forming thereafter for Ledger posting 
and all other purposes, an original record of the order and its 
jEulfilment. 



ACCOUNTING RECORDS 



23 



The duplicate copies retained in the office may, under a suitable 
system of filing, furnish particulars of orders on hand or completed. 

It is not to be supposed that the system indicated can always 
be put into operation and there must be many cases where, by 
reason of the nature of the business, other methods will be found 
more satisfactory. It has been set out simply as an instance of 
the manner in which the " Slip " system of records may be applied. 

Slip Cash Books. 

Every entry of cash received and paid forms a record in, and 
alters the balance of, the continuous account of cash. It may, 
therefore, be said that as a general rule, there is no distinctive 
advantage to be obtained in utilising the slip system, at any rate 
for those transactions directly entered into the Principal or General 





Discounts 
and Airces 


Cash 


A. B. & Co., Ltd. 

1Q 


N .. 101 

Date 

Name 








1 

1 

i 

1 




Received from 

pounds, shillings 

and pence. 






!i 














No. 102 
Date 

Name 




19.... 

Received from 

pounds, shillings 

and pence. 






Etc. 

















Cash Book. But in regard to subsidiary records of cash, incorpora- 
ted in daily or other totals in the General Cash Book, this may 
not be so. The case of Cash Sales may be taken as an example, 
in regard to which the detail transactions frequently appear 
only in a Receipt Book, or upon the slip of a Cash Register, being 
introduced into the general account of cash in total. Such 
simplifications of the methods of record involve the application of 
the principles of the " Slip " system. 

Reference has been made to the use of a subsidiary Customers' 



24 ACCOUNTING 

Cash Book to record cash received in respect of credit sales. It is 
not essential that the record be made in a bound book, and it is 
possible to use a form of counterfoil Receipt Book in the form 
given on the previous page, which will serve all necessary purposes. 

This form enables the additions to be carried forward from page 
to page and closed off in respect of each day's receipts. It also 
renders possible the preparation of a receipt for the customer of 
which a carbon duplicate may be retained in addition. Where some 
form of Slip Ledger is in use, it is simple, and may be advantageous, 
to arrange the book in such form that a triplicate can be obtained 
which can be attached to and filed with the sales slip, thus recording 
the satisfaction of the outstanding Ledger account. 

The consistent use of carbon duplicates for receipts and of a 
Receipt Book in the form given makes it difficult to avoid recording 
in the General Cash Book the full total received. 

In regard to cash payments, the " Slip " system does not seem to 
present any special advantages, and the ordinary method of record 
in a bound book is usually preferred. 

Slip Ledgers. 

In cases where single transactions are entered into with a con- 
siderable number of persons, a system of Ledger records may be 
instituted in a form less permanent than that of the ordinary 
form of a bound book. It will often be desired in such circum- 
stances to arrange that the particulars of amounts owing be retained 
in accessible form only until such time as the account has been paid. 

A method applicable to this purpose would be provided by 
arranging that the duplicate or an extra copy of the invoice be filed 
under some alphabetical or other system until payment, when it 
can be transferred to a permanent binder. By this means reliance 
is placed upon the original records of all transactions of sales, and 
the risk of an error involved either in making entries in the Sales 
Day Book or in posting therefrom to the Ledger is thus avoided. 

There is, of course, the necessity for arranging that the total 
shall be credited to Sales Account, but it is usual as a precaution 
against the risk of loss of any particular slip, and also as a consecu- 
tive record of sales made, to retain a duplicate of each sHp in the 
Invoice Book, from which the required total may be obtained. 

It is not usually possible to extend the application of the method 



ACCOUNTING RECORDS 25 

outlined to Ledger records in general, and where there is a number of 
transactions upon individual accounts, the ordinary form of Ledger 
will in all probabiUty prove more satisfactory. 

It is in some cases advisable to provide that statements of debtor's 
accounts should always be up-to-date. The instance of an hotel 
may be quoted in illustration. To secure this, it will be necessary 
to keep written up to date sHps, made out in such manner that they 
form a complete and sufficiently detailed record, showing the balance 
due from day to day. The slips should be filed upon such alphabet- 
ical or other arrangement as will enable them to be obtained 
immediately when required. 

Card Ledgers. 

Under the sub-heading " Slip Ledgers " some explanation has 
been given of a method of record of Ledger accounts upon slips not 
forming pages in a bound book. The system of Card Ledgers 
follows similar lines, and consists in the keeping of records upon 
cards arranged in a box or cabinet, each card in which contains a 
Ledger account and corresponds to the folio in a bound Ledger. As 
with slips, the cards are easily removed, but are usually controlled 
by some form of key and are to that extent less likely to be lost. 

The advantages of this method of record are — 

(1) The cards can be kept in any desired order, and an index 
may therefore be less necessary. 

(2) The whole series of transactions upon an account extending 
over more than one card can be contained on successive cards 
placed in order, and not, as may occur with the ordinary form of 
Ledger, be shown on non-consecutive foUos. 

(3) The Card Ledger in regular use can be relieved periodically 
of cards relating to " dead " or closed accounts, while new cards 
can be inserted as required. The Ledger is thus perpetual. 

On the other hand, there are certain disadvantages to be 
considered — 

(1) A card may be removed for fraudulent purposes and possibly 
an inaccurate one be substituted. 

(2) A card may be lost. 

It is sometimes suggested that records contained in a Card Ledger 
may not be accepted as evidence if produced in a Court of law. 
There can be little doubt that a card forming part of a regular 

»— (1377) 



26 ACCOUNTING 

system of book*keeping may be used to precisely the same extent 
as an account contained in a bound Ledger. In any case, the 
state of an account is not necessarily proved merely by production 
of the Ledger account, which is simply a record of transactions 
made as they have occurred, and which will enable a witness to 
confirm his recollection of the facts, but which, if its accuracy is 
questioned, is to be proved correct only by production of actual 
evidence of the transactions themselves. 

The disadvantages set out above do undoubtedly reduce the value 
of this form of Ledger. They may be to some extent lessened by the 
institution of a method of record of the cards inserted in and removed 
from the Ledger. Such systems, however, are not invariably simple 
to operate and the disadvantages are difficult altogether to avoid. 

Loose Leaf Ledgers. 

The aim in view in regard to this class of Ledger is that of 
combining the advantages of both the card and bound Ledger 
forms. 

When properly operated, it gives the conveniences in arrangement 
of accounts and continuity of the card system, while avoiding the 
risk of loss or misplacement, whether fraudulent or otherwise, of 
an account. 

The principle of Loose Leaf Ledgers consists in binding into a cover 
sheets, fixed in such a way that by unlocking (but — ^in a satisfactory 
form — ^by no other means than by tearing out a page) the folios can 
be removed, or, if necessary, fresh ones inserted. 

There is in this form of book no advantage attaching to Card 
Ledgers which it also does not possess. The leaves can be inserted 
in such order as may be desired; new leaves can be introduced when 
required; while those completely filled up or of closed accounts 
may be removed to a subsidiary Ledger. 

The Loose Leaf Ledger has the great advantage that to make an 
entry in it, does not, as in the case of a Card Ledger, cause all the 
accounts to be temporarily unlocked and thus removable at will. 
Such limited risk of displacement as does exist can usually be 
avoided by a record of leaves issued and transferred and by a 
periodical check upon the numbers of the leaves retained. 

The usual method of arrangement of the Ledger accounts is alpha- 
betical, thus rendering it self-indexing, but it is obvious that 



ACCOUNTING RECORDS 27 

accounts may be grouped in any way desired. They may, for 
instance, be collected under the names of travellers, arranged 
alphabetically, with a similar order for the accounts grouped under 
each name, or there may be a sub-index for each section, in which 
case new accounts would be placed behind the last in the particular 
group, and it would be possible to number the leaves of each group 
consecutively. 

The loose-leaf principle can be applied in regard to books of 
first entry, and is essentially the same as the sUp system, the leaf 
being fixed in a permanent binder when it has served the purposes 
of record intended. 

In practice, it is often found that a number of Ledgers for Debtors 
or Creditors, as the case may be, are kept, which contain many 
closed accounts. The use of a Loose Leaf or Card Ledger, which 
makes it possible to reduce the book in use so that it contains only 
" Hve " accounts, will enable all open accounts to be kept in a smaller 
volume. This may be a considerable advantage. 

It is sometimes claimed as a special advantage of the Slip, and 
to a certain extent of the Loose Leaf, systems, that they permit 
of a subdivision of the work of posting, extraction of balances, 
preparation of statements of account, etc. While this may be the 
case, it is clear that the release of slips and leaves from their proper 
place presents certain opportunities for fraud or carelessness. 



CHAPTER III 

SINGLE ENTRY 

The form of book-keeping termed " Single Entry " is of very 
limited value, and is seldom found in use in any case that involves 
credit transactions or dealings of large amount. It may, however, 
be found to exist where the business is concerned mainly with 
transactions for cash, or where accounting organisation is defective. 

Where all transactions are immediately concluded by a cash 
payment or receipt, and the increase in cash balance therefore 
furnishes an index of profit, single entry may prove to be an 
adequate record for purposes in view. These circumstances, 
except perhaps as regards shopkeepers and the like, for whom a 
system of book-keeping by double entry may seem desirable in 
theory but practically impossible, seldom apply, and single entry 
as a system of record is rarely adequate. 

An accountant may be concerned in the ascertainment of financial 
position and results of transactions recorded by single entry, 
and he may be required, either to convert the records into double 
entry, or to express the results in the form which they would have 
assumed had this method been employed. 

The problems arising may be summarised thus — 

(1) The opening of a set of books on the system of double 
entry from single entry records; 

(2) The ascertainment from single entry records of past profits 
or losses; 

(3) The absolute conversion to double entry of books written 
up on the principle of single entry. 

Opening Double Entry Books from Single Entry Records. 

The first of the problems indicated is difficult only in that the 
records available are not as a rule in a form which furnishes com- 
pletely and conveniently the information required. It is necessary 
that a full and accurate statement of the financial position be 
prepared. This will contain all assets and liabiHties and disclose 
the surplus representing the proprietor's capital. It has been 

28 



SINGLE ENTRY 



29 



pointed out elsewhere that it is not necessarily the case that double 
entry provides an accurate statement of all transactions, but the 
system of record which double entry implies renders error less easy 
than under single entry, and it is seldom the case that a system of 
accounting not founded on the principle of the former provides 
from the books themselves full information as to assets and 
liabiUties. 

Single entry, in ^heory, involves one entry in regard to each 
transaction, but it is probable that the term is used to describe any 
method that does not adopt double entry in its complete form, and 
is applied to systems involving partial double entry. It may be 
found that only personal accounts are kept, together with a record 
of each transaction; the latter would be posted to the personal 
accounts, and to this extent give partial double entry. In other 
cases, however, no Purchases, Sales or other Journals may exist, 
and it is seldom that impersonal Ledger accounts are maintained. 

The difficulty in opening a set of books upon double entry 
consists entirely in the ascertainment of the financial position at 
a given date. The Ledgers, if any, may furnish information as to 
debtors and creditors, the latter proved or supported by the invoices; 
stock will be taken in the ordinary way; cash and bank balances 
must be ascertained; and, from any particulars available, the proper 
value of other assets, such as Plant and Machinery, Fixtures, 
Buildings, etc., must be obtained. For some of these, the informa- 
tion at- hand may be inadequate to enable a sound judgment to 
be made. It is in this connection that the principal difficulty 
arises. 

Assuming that the difficulties referred to are successfully dealt 
with and the following Statement of Affairs is prepared — 

STATEMENT OF AFFAIRS. 1st January. 1918. 



Liabilities. 


£ 


Assets. 


£ 


Sundry Creditors 


1.262 


Plant and Machinery . 


864 


Provision for Rent. Rates, 




Fixtures and Fittings 


64 


etc., outstanding 


47 


Sundry Debtors 


1.322 






Stock on hand . 


643 




1.309 


Bank 


541 


John Jones. Capital . 


2.140 


Cash in hand 


15 



3.449 



3,449 



30 



ACCOUNTING 



a Journal entry for opening the books upon the basis of 
particulars shown would be framed as follows — 



the 



1918. 










Jan. 1 


Sundries ..... Dr. 










To Sundries . 






£ 


I 




Plant and Machinery- 






864 






Fixtures and Fittings 






64 






Sundry Debtors 






^ 1,322 






Stock on hand 






643 






Bank .... 






541 






Cash .... 






15 






Sundry Creditors 








1.262 




Rent, Rates, etc. (or Suspense A/c) 






47 




John Jones, Capital A/c 






2.140 




Being assets and liabilities at date. 









The balances accounting for the items of Sundry Debtors, Bank, 
Cash, Sundry Creditors, etc., are possibly already contained in the 
books, and, unless an entirely new set is being opened, would not 
require to be posted from the entry given. 

From this stage, the problem presents no special difficulties. 
It will be necessary merely to introduce the books of first entry 
required, arranged in such manner as the nature of the transactions 
to be recorded may render necessary, and to provide for a complete 
system of accounting upon the double entry system for the 
future. 



Ascertainment of Results from Single Entry Records. 

The second problem submitted depends for its solution upon 
the preparation of statements of the financial position as at beginning 
and end of the period under consideration. It has already been 
stated that profit is indicated by the Balance Sheet and is not 
dependent on a system of book-keeping, although its ascertainment 
is facilitated thereby. It will appear as the amount by which the 
surplus of assets over liabilities has improved, with due regard to 
drawings (if any), for these, if undrawn, would have operated to 
increase the surplus at the later date. Thus, the ascertainment of 
the amount of profit introduces no new feature of difficulty, but this, 
without particulars of the gains and losses contributing to the net 
result, would not be of great value, and the problem under con- 
sideration resolves itself rnore frequently into the ascertainn^ent 



SINGLE ENTRY 31 

of net profit, together with an analysis of gains and losses in the 
form of the ordinary Profit and Loss Account. 

In order that this may be accomplished and may be made an 
accurate summary, it will be necessary in the first place to analyse 
such entries as the books contain, constructing concurrently the 
double entry, where non-existent, by raising any necessary totals, 
and proving the general accuracy of the analysis by the preparation 
of a Trial Balance (in manner hereafter explained) in the form 
which this would have assumed had double entry been adopted 
throughout. 

For the purposes of more detailed explanation, it is assumed 
(in a given case) that the following books exist in respect of what is 
loosely termed a system of single entry, viz. — 

Debtors' Ledger, 
Creditors* Ledger, 
Cash Book. 

The Cash Book contains both cash and bank transactions, and is 
duly posted so far as personal accounts are affected. It will 
probably prove necessary to check the accuracy of the postings, 
and to rectify all errors existing. 

The first step will be the ascertainment of the position as at the 
opening date. It is assumed, as a matter of convenience, that this 
is correctly set out in the Statement of Affairs as at 1st January, 
1918, shown on p. 29, which, for the purposes of the proposed 
analysis, is to be taken as having created Ledger balances in the 
form shown by the Journal entry on p. 30. So far as the balances 
of Debtors and Creditors as they appear in the Ledger differ from 
the amounts accepted in preparation of the opening statement, it 
will be necessary to adjust the Ledger. 

Of the various balances shown. Debtors, Creditors, Cash and 
Bank balances appear in the books. The remaining items may 
actually be opened as balances if desired, but it will probably be 
sufiicient to regard them for the moment as equivalent to balances, 
treating them as such when the final statement in the form of a 
Trial Balance is prepared. 

The next step will be the analysis for the period in question 
(assumed as the year 1918) of the books of account actually 
kept, 



32 



ACCOUNTING 



The Debtors' Ledger may be taken first for consideration, and 
would be analysed as to each account, page by page, as shown on 
page 33. 

Single entry, owing to its absence of system, is frequently 
accompanied by considerable laxity in the squaring of Ledger per- 
sonal accounts, and in constructing an analysis in the manner 
indicated it may frequently be necessary to give effect to entries 
required for discount allowed and received, credits and allowances, 
etc. 

The result of the classification obtained may be set out (with 
assumed figures) as follows — 

DEBTORS' LEDGER ANALYSIS. 





Cash credited ...... 

Discounts allowed ..... 

Returns 

Bad Debts 

Balances at 31st Dec, 1918 

Balances at 1st January. 1918 . 

Sales 

Cash debited 


Dr. 

5,035 

112 

116 

34 

1.450 


Cr, 

£ 

1.322 

5,360 

65 






6.747 


6,747 



The amount appearing from this summary as the total of cash 
credited to the accounts of debtors should, of course, agree with 
the corresponding tot£j of the amounts recorded as Cash Book 
receipts under this head. 

The analysis of the Creditors* Ledger follows similar lines, and 
will be made as shown on the following page. 

The information obtained (again with assumed figures) will be 
set out as follows — 

CREDITORS' LEDGER ANALYSIS. 





Balances as at 1st January, 1918 

Purchases 

Cash credited 

Cash debited 

Discounts received ..... 

Returns 

Balances as at 31st December, 1918 


£ 
1.262 
4,640 
26 


£ 

4.822 
56 
32 

1.018 




5.928 


5.928 











PQCO 

13 










Ifc 














1 




























i 




d 








s 






"2 








S 














1 














8°' 












«■ 


i 






1 














34 



ACCOUNTING 



As in the case of the Debtors' Ledger, the cash entered in the 
Creditors' Accounts will have been posted from the Cash Book, 
and will therefore agree with the corresponding total appearing 
upon the analysis of cash transactions yet to be described. 

The entries resulting in the construction of such Ledger accounts 
as have been created will thus have been classified. It remains 
to analyse the cash transactions. 

For this purpose, the following form may be adopted — 



Dr. 



Gr. 



Balance as 
at 1st Jan., 
1918, and 
Capital A/c 
Items. 



Debtors* 
Ledger. 



Creditors' 
Ledger. 



Cash 
Sales. 



Realisa- 
tion of 
Assets 
and 

Sundries. 



Total. 



Creditors' 
Ledger. 



The results of the analysis obtained will be set out as follows, 
the amounts stated being, of course, assumed for the purposes of 
more complete illustration — 



ANALYSIS OF CASH BOOK. 



Balance as at 1st January, 1918 . 


i 


556 


Capital A/c (amounts received) . 




680 


Cash credited, (Debtors' Ledger) 




5,035 


,, (Creditors' Ledger) 




26 


Cash Sales 




365 


Investments A/c (realisation) 




640 


Cash debited (Creditors' Ledger) . 


4,822 




,, ,, (Debtors' Ledger) . 


65 




Investments A/c (purchase) 


655 




Plant and Machinery (purchase) . 


35 




Cash Purchases 


82 




Wages 


340 




Office Expenses ..... 


180 




Rent and Rates ..... 


170 




Other Trade Expenses .... 


76 




Drawings ....... 


254 




Balance as at 31st December, 1918 


623 






7,302 


7,302 



It will be observed that the analysis of transactions appearing 
in the Cash Book has been made by treating cash and bank entries 



SINGLE ENTRY 



35 



as if both were made upon the same account. It must, however, 
be ascertained by the checking of the bank pass-book that the 
Cash Book contains all bank account transactions, in order that 
the analysis may be complete. The balance as at 31st December, 
1918, may, of course, be divided as between the amounts for cash 
and bank respectively. 

The whole of the entries contained in the books have thus been 
analysed and the results of analysis set out in a series of what may 



Debtors' 
Ledger. 



Capital 
Expend- 



Re venue Accounts. 



Cash 
Pur- 
chases. 



Wages. 



Office 
Expenses. 



Etc. 



Drawings 

and 
Balance as 

at 31st 
Dec, 1918. 



Total. 



be termed for convenience Trial Balances, thus arriving at the 
result achieved by double entry. 

It may still be necessary, as with a Trial Balance prepared from 
entirely accurate records, to consider whether there are omissions 
of assets or liabilities in the figures set out, and whether any assets 
are stated beyond their true value. 

The following statements are now to be dealt with in an 
amalgamated Trial Balance, viz. — 

Statement of Affairs, as at 1st January, 1918, 
Analysis of Debtors' Ledger, 

„ „ Creditors' Ledger, 

„ „ Cash Book. 

This amalgamation will have the effect of eliminating items 
appearing on both sides, such as the opening balances of debtors, 
creditors and cash. Treating such amounts as cancelled, a summary 
of the remaining items may be prepared as in the form given on 
page 36. 

From the Trial Balance as now appearing, and with the value 
of the Stock on hand at the closing date, the Trading and Profit and 
Loss Accounts and Balance Sheet can be prepared. In drawing 
up these statements it will be of importance, as already noted, 
particularly in view of the inadequate system of accounting from 



36 



ACCOUNTING 



which the statements have been compiled, to inquire whether, on 
the one hand, the figures contained in the Trial Balance are inclusive 
of all habilities, and, on the other, whether the values attributed 
to assets are accurate. 



TRIAL BALANCE as at 31st December, 1918. 





Statement of Affairs — 


£ 


£ 




Plant and Machinery .... 


864 






Fixtures and Fittings .... 


64 






Stock on hand ..... 


643 






Rent, Rates, etc., outstanding 1st Jan., 








1918 




47 




John Jones, Capital A/c 




2,140 




Debtor's Ledger Analysis — 








Discounts allowed 


112 






Returns Inwards ..... 


116 






Bad Debts 


34 






Balances as at 31st December, 1918 . 


1,450 






Sales 




5,360 




Creditors' Ledger Analysis — 








Purchases ...... 


4,640 






Discounts received 




56 




Returns Outwards 




32 




Balances as at 31st Dec, 1918 . 




1,018 




Cash Book Analysis — 








Capital A/c 




680 




Cash Sales 




365 




Investments A/c (loss) . . . . 


15 






Plant and Machinery . . . . 


35 






Cash Purchases . . . . . 


82 






Wages 


340 






Office Expenses 


180 






Rent and Rates 


170 






Other Trade Expenses . . . . 


76 






Drawings 


254 






Bank balance, as at 31st December, 1918 . 


610 






Cash 


13 






9,698 


9.698 



The analysis of entries according to the methods indicated 
will in the ordinary course correct or confirm, to a considerable 
extent, the opening Statement of Affairs, in that it may bring under 
consideration transactions disclosing assets and/or liabilities of the 
antecedent period which have not so far been included therein. 

It is necessarily the case that the details of the method of analysis 
adopted must be adapted to the circumstances. It may be neces- 
sary, perhaps, to vouch some considerable part of the entries made 
or to write up transactions unrecorded, to ensure that the final 



SINGLE ENTRY 37 

summary shall be a sufficient basis for preparation of Profit and 
Loss Account and Balance Sheet. 

Conversion to Double Entry. 

The further problem suggested, that of detailed conversion to 
double entry of transactions recorded by single entry presents 
little difficulty. There will, perhaps, not be many occasions when 
this is necessary, for the results obtained by the method of analysis 
already described represent probably the principal advantage 
obtainable from the more laborious course indicated. It will 
probably prove sufficient in the majority of cases to arrange that 
the system introduced for the future provides the essentials of an 
adequate system of record by double entry. 

Should it be necessary to enter upon the work involved by the 
construction of a complete double entry within the books themselves, 
this will involve the writing-up of the various books of first entry 
not hitherto kept. Analysis of Ledger accounts may still be required 
in order to obtain the necessary information, and difficulty may be 
experienced in giving effect to the entries, materials for which will 
be obtained from many Ledger accounts, in chronological order. 



CHAPTER IV 

STOCK AND STORES ACCOUNTS 

Reference has been made elsewhere to the importance of strict 
accuracy in the records of the quantities and values of stock. In 
businesses of a certain character such as jewellers, diamond mer- 
chants, etc., where the cost of each item of stock is considerable, 
an absolute record of each transaction of purchase and sale in the 
Stock Accounts is commonly regarded as essential, but in other 
cases less exact methods which are yet sufficiently accurate for the 
purpose in view may be employed. The various forms which stock 
records may assume are alike in principle. In certain instances, 
more particularly in regard to raw materials, etc., consumed in 
manufacturing operations, the records may be limited to entries 
of quantities or bulk, while in other cases they may contain full 
particulars of money values. Two examples are submitted in 
illustration. That first given records the transfer of raw material 
from store to process, and traces its progress through three distinct 
stages of manufacture, each involving different standards or units 
of cost. It may be taken as applicable, say, to a business under- 
taking the conversion of scrap rubber into a serviceable finished 
product, or some similar series of operations. The second example 
purports to be an extract from the Stock Book of a firm of Provision 
Merchants. In this book a separate section under the one general 
heading of the type of goods in question would be opened for each 
lot purchased. The result of aU such accounts in total should be 
capable of agreement with the gross profit appearing upon general 
stocktaking. 

RAW MATERIALS. 



1919. 

Dec. 31. To Stock on hand 13,280 lbs. 

1920. 

Jan. 31. „ Purchases . . 6,416 „ 

Feb. 28. „ do. . . 5,680 „ 

Mar. 31. „ do. . . 8,732 „ 



34,108 



Mar. 31. To Balance . . 11,698 



1920. 
Jan. 31. By Transfer to 

process " A" 7,420 lbs. 

Feb. 28. „ Do. do. 8,430 „ 

Mar. 31. „ Do. do. 6,560 „ 

„ Balance . 11,698 „ 



34,108 



38 



STOCK AND STORES ACCOUNTS 



39 



STOCK ACCOUNT PROCESS "A. 



1919. 

Dec. 31. To Stock in pro- 
cess at date . 1,615 lbs. 



1920. 
Jan. 31. 

Feb. 28. 
Mar. 31. 



Transfers of 

raw materials 7,420 

Do. do. 8,430 

Do. do. 6,560 



24.025 



Mar. 31. To Balance 



1,186 



1920. ' 

Jan. 31. By Transfer to 
Process " B 
Feb. 28. „ Do. do. 

Mar. 31. „ Do. do. 

„ Waste (2 o/o) 
,, Balance 



8,716 lbs. 
6,440 „ 
7,236 „ 
447 „ 
1,186 „ 

24.025 .. 



STOCK ACCOUNT PROCESS " B.' 



1919. 






1920. 




Dec. 31. 


To Stock in pro- 




Jan. 31. 


By Transfers to 




cess at date . 


2,245 lbs. 




Process " C " 6,873 lbs. 


Jan. 31. 


Transfers from 




Feb. 28. 


„ Do. do. 7,462 „ 




Process " B " 


8,716 „ 


Mar. 31. 


„ Do. do. 7,741 „ 


Feb. 28. 


„ Do. do. 


6,440 „ 




„ Waste (3-5 %) 776 „ 


Mar. 31. 


„ Do. do. 
To Balance . . 


7,236 „ 
24,637 „ 


)t 


„ Balance . . 1,785 „ 




24,637 „ 


Mar. 31. 


1,785 „ 





STOCK ACCOUNT PROCESS " C." 



1919. 




1920. 




Dec. 31. 


To Stock in pro- 


Jan. 31. 


By Transfer to 




cess at date . 1,265 lbs. 




Finished Stock 7,140 lbs. 


1920. 




Feb. 28. 


„ Do. do. 7,213 „ 


Jan. 31. 


„ Transfers from 


Mar. 31. 


„ Do. do. 6,851 „ 




Process " B " 6,873 „ 


,, 


„ Waste (1 %) . 219 „ 


Feb. 28. 


„ Do. do. 7,462 „ 


,, 


„ Balance . . 1,918 „ 


Mar. 31. 


„ Do. do. 7,741 „ 














23,341 „ 




23,341 „ 






Mar. 31. 


To Balance . . 1,918 „ 







FINISHED STOCK ACCOUNT. 



1919. 






1920. 




Dec. 31. 


To Stock on hand 


15,280 lbs. 


Jan. 31. 


By Sales . . . 8,762 lbs. 


1920. 






Feb. 28. 


„ „ ... 13,141 „ 


Jan. 31. 


„ Transfers from 




Mar. 31. 


„ „ ... 5,653 „ 




Process " A " 


7,140 „ 




„ Loss on Stock- 


Feb. 28. 


„ Do. do. 


7,213 „ 




taking . . 34 „ 


Mar. 31. 


„ Do. do. 
To Balance . . 


6,851 „ 




„ Balance . . 8,894 „ 




36,484 „ 


36,484 „ 


Mar. 31. 


8,894 „ 





Notes. — The quantities of Purchases and Sales are to be obtained from 
the Day Books by the adoption of a simple form of ruling with a column for 
weights. Those of goods in process should be obtainable under any 
satisfactory system of factory accounting, as hereafter explained. 



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STOCK AND STORES ACCOUNTS 41 

The two systems illustrated obviously are of considerable service 
in the verification of stock-taking results, and have further advan- 
tages in providing those responsible for direction of the business 
with a sound idea of the quantity and nature of the stocks under 
their control. 

This must not only conduce to greater economy in investment 
of capital in stocks, but (in Case 1) enable production to be adjusted 
to current requirements, or (in Case 2) a better view to be formed 
of the sources of the profit earned. In the latter, it will be observed 
that it has been found expedient to develop the stock records so 
as to include values. 

In a factory of importance, the Stores Ledgers will be kept in the 
General Office, and be supplemented by a record in each Stores in 
the form of Stock or Bin Cards. Dealing first with the latter, we 
may, for convenience, divide Stocks into (1) Raw Materials, (2) 
Process Stocks. 

Raw Materials. 

Debits will be opened on Bin Cards from signed and checked 
Receiving SUps. The General Office will make out a slip in respect 
of each invoice or advice to hand, and this will be issued to the 
Stores Clerk in duplicate. The slip will contain such particulars 
as to quantity, quaUty, etc., of goods receivable, as will enable 
the Stores Clerk to sign a receipt for the goods, or, alternatively, 
to qualify his receipt by note of differences in weight, etc. Upon 
receipt of the goods, the Stores Clerk will clear the Receiving Slip, 
enter up his Bin Card, and advise the General Office by an Inwards 
SHp or by return of the Receiving Slip duly discharged. The 
latter will form the basis of entry in the Stores Ledger and be cross- 
checked eventually against the invoice for the goods as entered in 
the Purchases Journal. Issues will be based on Requisitions from 
factory departments, rendered to the Stores Department in 
duplicate. On issue of goods, one copy will form the basis of entry 
on the Bin Card, the other will accompany the goods and be returned 
receipted. Where frequent issues are made daily, a Daily 
Requisition may be used and the daily total posted. 

The particulars of opening stocks, receipts, issues and finishing 
stocks in each section of the Stores will be represented in a Daily 
Return, rendered to General Office and supported by Receiving 

4— (1377) 



42 ACCOUNTING 

Slips and Requisitions (receipted). It may be arranged that the 
Stores Ledgers be posted from the totals shown on these sheets 
and not from the detailed records referred to. 

In a large factory the Stores Ledger may contain several hundreds 
of accounts, each supported by a Daily Return. 

In such cases it is usual (and it is desirable even where the stock 
is not either great or varied) to employ a staff upon Continuous 
Stocktaking, whose duty it is to take a physical stock against selected 
Bin Cards at frequent intervals. By this means errors in Bin Cards 
and Stores Ledgers are quickly ascertained and adjusted. 

Process Stocks. 

The record of stocks in process is frequently complicated by 
reason of physical changes in the raw material. Some record is, 
however, desirable, and is usually obtained by a system of depart- 
mental returns of material received, output delivered and stocks on 
hand. A simple illustration is given on pp. 38 and 39. In this 
particular case the nature of the operations lends itself to systematic 
record in the form of Ledger accounts. This can hardly be so in 
other cases, as, for instance, the class of business to which Process 
Costs are applicable, when rehance must be placed upon Factory 
Returns, tested by quantitative analysis in manner described 
elsewhere (see Cost Accounts). Ledger records can, of course, be 
kept in respect of Finished Products, and these, together with the 
departmental stocks, should be checked by the continuous stock- 
taking already referred to, while, so far as the circumstances lend 
themselves, the system of Bin Cards will be found to be a useful 
supplementary record. 

The record of Stores and miscellaneous Stocks of a small engineer- 
ing shop or similar concern is sometimes arranged for the 
smaller articles, such as screws, nuts, bolts, etc., in a similar 
manner. 

It is essential that each size and description of article be kept 
separately, and for this purpose the stock can conveniently be 
arranged in a system of compartments, each duly ticketed with a 
Bin Card showing the class of goods contained therein. Such 
tickets or cards may be ruled in the form of a Stock Ledger 
account, and so affixed as to be easily detached for the purposes of 
entries. 



STOCK AND STORES ACCOUNTS 



43 



Example- 
No 



STOCK CARD. 



Date. 



Goods in. 



Quantity. 



Date. I Goods out. 

I 



Quantity. 



The balance of quantities shown by the cards from time to time 
give an index of stock requirements, while the cards themselves, 
which are written up from the Stocks Received and Stock Issued 
Books, show the particulars of receipts and issues of the goods in 
question. The chief drawback to this extension of the Card System 
is the absolute reliance necessarily placed on the Stock Clerk, and 
the difficulty of independent check. It is, however, not difficult 
to obtain a general, though inexact, control by values, in con- 
junction with a suitable subdivision of the purchases in the financial 
books, while periodical tests will be made of the accuracy of entries 
on the Bin Cards. 

In arranging the general lines of Stores Accounts distinction is 
usually made between Raw Materials, i.e., those forming a basic 
part of production, and General Stores, including the minor acces- 
sories of a factory, such as oil, waste, (some) chemicals, repairs 
stores, etc. In some cases the records may comprise a register of 
working tools, or loose tools and plant. The form of a Plant 
Ledger (for fixed plant) is given elsewhere, and the necessary 
adaptation is obvious. 

In operating any considerable system of Stores Accounts, diffi- 
culties of valuation of issues to production may be encountered, 
usually in cases where there have been fluctuations in buying 
prices, and cost prices of actual articles issued are not readily 
ascertainable. The usual course is, either to assume the value of 
issues as the values of those articles longest in stock, or to take them 
at an average price with periodical adjustment by revaluation of 
stocks on hand. 

There are in ordinary use in comparison with book-keeping records 
two forms of indirect check upon stocks known as the " seUing 
price " and " departmental gross profit " systems. 



44 



ACCOUNTING 



The former proceeds upon the principle of charging a branch 
or department with the selling value of stock transferred to it, thus 
making it accountable for the full proceeds of such goods, either in 
cash, if sold, or in the sale price of the portion unsold, or, of course, 
partly by both. 

For convenience of explanation, pro forma Trading Accounts 
are submitted, prepared in reference to the same transactions, the 
former framed according to the usual methods, the latter upon the 
" selling price " principle under consideration. 



TRADING ACCOUNT (1). 



1918. 
Jan. 1 
Dec. 31 



To stock on hand . . 
„ Purchases 
„ Balance, Gross Profit 
9=0/ 



£ 

11,850 
46,517 

16,009 



74,376 



1918. 
Dec. 31 



By Sales . . . 
„ Stock on band 



£ IS. 

64,0361 - 
10,340 - 



Note.— 25 % on Selling Value equals 33} % on cost. 

TRADING ACCOUNT (2). 



1918. 
Jan. 1 
Dec. 31 



To Stock on hand 
„ Purchases 



£ \s.\ci. 
15,800; - - 
62,023; - - 



77,823; -| 



1918. 
Dec. 31 



By Sales 
„ Stock 



£ i s. d. 

64,0361 

13,787 1 



77,823| -I - 



In the second account the Purchases and the Stocks at beginning 
and end of the trading period are valued at selling prices, and are 
balanced by the actual proceeds of sales. 

In practice, of course, the system will not work out with absolute 
exactness, and differences are bound to arise, which, in the absence 
of fraud, should not be large, at any rate, where the rate of gross 
profit can be approximately calculated in advance. 

This method is perhaps best suited to the small branches of a 
retail business, dealing mainly for cash, and in regard to which 
it is found desirable to simphfy the book-keeping at the branches 
as much as possible. 

The alternative method proceeds upon a similar assumption 
of the earning of an approximate average of gross profit, which, 
when duly debited against the Trading Account, determines 
(although by estimate) the approximate value of the stock on hand. 
The account, however, is in other respects constructed on ordinary 
lines. 



STOCK AND STORES ACCOUNTS 



45 



ILLUSTRATION. 

BOOT AND SHOE DEPARTMENT, TRADING ACCOUNT. 



1918. 
Jan. 2 



Jan. 9 
16 



Jan. 16 



To Stock on hand 

(actual) 
„ Purchases 
„ Gross Profit (cst'd) 

30% . . . . 



To Stock on hand . . 
,, Purchases 
„ Gross Profit (est'd) 
30% . . . . 



To Stock on hand (est'd) 



i 

687 
143 


s. 


d. 


1918. 
Jan. 9 


70 


- 


- 




900 


- 


- 




665 
245 


: 


: 


Jan. 16 
»» 


94 


- 


- 




1,004 


_ 


_ 






•sai 


OB 




689 




- 





By Sales . . . . 
„ Stock (estimated) 



By Sales . . 
„ Stock (est'd) 



i 
235 



900 



315 



1.004 



This system is peculiarly suited to the purposes of a trading 
stores with a fair number of departments. Where, from past 
experience, the rate of gross profit can be determined with reason- 
able accuracy, no great differences should appear as between the 
values of actual and estimated stock. It is obviously inconvenient 
to arrange for a weekly stocktaking, and by a statement in the 
general form given, the approximate fluctuations in stock can be 
observed. In practice it wiU be found to be the case that depart- 
mental managers are desirous of improving their respective turn- 
overs by holding for disposal as large and as varied a stock as 
possible. A continuous increase in the estimated values of the 
stock may thus be explained, and would then be subject to the 
approval of those in control of the business as a whole, or it may be 
that it is caused by defalcation in respect of turnover, or, again by 
the debiting of a rate of gross profit greater than that actually 
earned. 

It must be understood, of course, that the departmental Trading 
Accounts do not appear in the books of account in the form given. 
They are prepared chiefly as an interim check upon the trading 
transactions and should be confirmed by the ordinary periodical 
stocktaking. For convenience, the schedule of departmental 
estimates is usually presented in tabular form as given on page 46. 

Goods on Appro, or on Sale or Return. 

The consideration of the treatment of goods sent " on approval " 
or on terms of ''on sale or return " may properly be introduced in 
connection with Stock Accounts, for such goods, until accepted. 



46 



ACCOUNTING 



1918. 




Dept. A. 


Dept. B. 


Dept. C. 


Dept. D. 


Etc. 


Jan. 2 
„ 9 


Stock on hand 
Purchases . 
Gross Profit 

Less Sales . 

Stock on hand 
Purchases . 
Gross Profit . 

Less Sales . 

Stock on hand 
























., 9 
» 16 
























„ 16 

























constitute stock. For purposes of record of the despatch of such 
goods a memorandum may possibly serve all necessary requirements 
particularly where made in a book so ruled as to be capable of being 
used as an ordinary Journal also. In the example set out, it is to 
be understood that the last column alone affects the book-keeping 
entries, the other particulars being in the nature of memoranda 
only. 



Date. 



Goods Despatched. 



Name and Particulars. 



Stock 

Book 

Fo. 



In- 
voice 
No. 



Amount. 





Goods Returned. 


Goods Accepted. 


Date. 




Stock 

Book 

Fo. 


Amount. 


Fo. 


Amount. 























A book in the above form should, from inspection, readily furnish 
particulars of goods not returned. Care has naturally to be exer- 
cised in stocktaking to provide that goods not marked off in the 
Appro. Book have not in fact been returned, nor again, charged 



STOCK AND STORES ACCOUNTS 47 

elsewhere as an ordinary sale. In the former case, the risk will 
be that of inclusion twice in the stock on hand, and in the latter of 
inclusion of the goods as part of the stock out on appro, in addition 
to the book debt opened in respect of the transaction. 

To avoid the latter difficulty, it is sometimes preferred to post 
to the Ledger accounts of customers (in memorandum) the values 
of the goods, keeping for this purpose a Ledger in double column of 
which the left-hand columns, debit and credit, record the despatch 
and return respectively of goods on appro. 

Crates, Packages, etc. 

The practical problems involved in connection with the records 
of crates, packages, etc., are as follows — 

(1) The articles in question are frequently of considerable value. 

(2) The charge made for those not returned usually shows a 
profit above cost. 

(3) The greater part of those charged up are likely to be returned, 
and will, as the result of use, be worth less than cost. 

There are two alternative methods in common use — 

(1) Where the usual practice is to return crates, etc., it may 
be thought most convenient not to record them in any way upon 
the customers' Ledger accounts, but to keep merely a memorandum 
thereof, to show their despatch and due return. For this purpose 
a modification of the card system may be found of advantage. 

(2) As a matter of strict accounting, a more satisfactory method 
is to charge up the full amount of the invoice (inclusive of crates, 
etc.) upon the Ledger accounts, and to credit the customer as and 
when the crates are received back. It is desirable, however, that 
a form of Ledger ruling be adopted that wiU distinguish the entries 
in respect of these articles from those for ordinary goods. This 
distinction is the more important in that the debits in question 
cannot be said to be of full value as debts, and it will be necessary 
when drawing up the Profit and Loss Account, to make provision for 
the loss in value of crates, etc., outstanding as balances upon Ledger 
accounts, but which are likely subsequently to be returned. 

Where this system is adopted, it is convenient to use a form 
of Ledger with double money columns, for crates, etc., and goods 
respectively. 



CHAPTER V 

ANALYSIS OF TRANSACTIONS (I) 

Books of first entry are frequently in columnar form, permitting of 
analysis of entries according to the method desired. The object 
of such analysis is the furnishing of totals of particular classes 
of transactions, determined possibly by their effect on the 
book-keeping system (as where the classification is made according 
to the Ledgers containing the double entry), cr undertaken with the 
object of classifying transactions according to their nature. These 
objects may be combined. 

Adjustment Accounts. 

It is proposed first to consider the uses of the method of analysis 
where employed to assemble totals of entries from the various 
books of prime entry in relation to the Ledgers affected, on what 
is known as the system of " sectional balancing." By this means, 
the prima facie accuracy of a Ledger, or group of Ledgers, may be 
estabUshed, without regard to others. Differences shown in the 
double entry by the Trial Balance may thus be located and more 
easily discovered. 

For the purpose in view, it is usual to create in respect of each 
Ledger, or group of Ledgers, a Controlling or Adjustment Account, 
representative in summary form of the detailed entries in such 
Ledger or group. 

When properly constructed, the Adjustment Account will contain 
no entry, in detail or as part of a total, which is unrecorded in 
the subsidiary Ledger, nor on the other hand will it omit to record 
any transaction which may be contained in the latter. 

On the following page is the pro forma Adjustment Account 
relating to the Sales or Debtors' Ledgers of a trading company. 

Upon consideration of the account set out, it will be observed 
that it forms a summary of the entries made in detail upon the 
accounts in the subsidiary Ledger. It requires little demonstration 
to show that an account accurately prepared in this manner and 
according to the principles described must show as a balance an 

48 



ANALYSIS OF TRANSACTIONS (l) 



49 



amount equal to the toted of the detailed balances in the Debtors' 
Ledger or Ledgers to which it relates. 



SALES LEDGERS' ADJUSTMENT ACCOUNT. 



1917. 




£ 


s. 


d. 


1918. 




£ 


s. 


d. 


Dec. 31 


To Balance . 


24,220 


- 


- 


Dec. 31 


By Cash . 


274,675 


- 




1918. 












„ Discount 


618 


— 




Dec. 31 


„ Sales 


286,135 


_ 


_ 




„ Returns & Allowances 


1,122 


— 






„ Cash 


322 








„ Bad Debts 
„ Bills Receivable 
„ Transfers to other 
Ledgers 


179 
345 

1,320 


- 


- 










- 


" 


„ Balance carried down 


32,418 


- 


- 




310,677 


- 


i 310,677 




JL 


1918. 














1 
1 






Dec. 31 


To Balance brought down 


32,418 


- 


- 






1 







There is an obvious advantage in the abihty to estabhsh the 
accuracy of some particular Ledger or group of Ledgers without 
regard to others, and the operation of the system of double entry 
in regard to any considerable volume of transactions would become 
very difficult without a series of controls of the kind described. 
In practice, the main Adjustment Account, controUing a group of 
Ledgers, may be found to be subdivided, so as to provide a separate 
control account for each Ledger of that group. 

Thus, for purposes of contrast, a trading concern using (say) 
three Ledgers, each with approximately 1,000 accounts, may pro- 
perly and conveniently keep three distinct Adjustment Accounts; 
on the other hand, a bank with (say) forty Ledgers would find it 
impossible so to arrange the books as to provide analysis for so 
large a number. These would be arranged into various main 
groups. Current Accounts, Deposit Accounts, Produce Loans, etc., 
and a Control Account for each would be maintained in the General 
Ledger. The main accounts would then control the whole of 
the Ledgers in the various groups, and differences could be located 
accordingly. It would not be impossible, however, for a subsidiary 
analysis to be made of the entries falling into each group, so as to 
provide a control on a less extensive basis; this, however, would 
be additional to the main account for that group and would not 
find place in the General Ledger. 

For convenience in arriving at the desired analysis, the books 
of first entry will be arranged in columnar form. Assuming that 
it is proposed, for example, to arrange for the control by Adjustment 



50 



ACCOUNTING 



Accounts of each of three Debtors' Ledgers, classification of entries 
proceeding from the following books will be required, viz. — 

Sales Day Book, 

Returns and Allowances Journal, 

Cash, 

Ordinary Journal. 

The last-named will contain such entries as relate to bills 
receivable, bad debts, transfers, etc. 

The Sales Day Book and Returns and Allowances Journal will 
be modified in form as follows — 



Date. 


Particulars. 


Fo. 






Debtors* Ledgers. 




A. 


B. 




c. 


























i 

I 







Each entry in the Total column will be extended into the column 
of the Ledger affected by the double entry, and thus the total sales 
for the period will be classified. Sales Account will be credited 
with the Total and the individual Adjustment Accounts debited. 
The separate amounts of each sale will be posted as usual to the 
accounts in the Debtors' Ledgers, and the additional posting to the 
Adjustment Accounts involves an apparent departure from 
principle. 

This theoretically is the case, for under the system described 
complete double entry exists within the General Ledger, and the 
Debtors' Ledgers, while they contain important and essential 
records, are regarded as a separate section of the accounting system, 
subject to control by, but independent of, the main Trial Balance. 

This theoretical difficulty may be entirely removed by the 
creation, within each Debtors' Ledger, of a General Ledger Adjust- 
ment Account, which will appear in exact reverse of the Sales 
Ledger Adjustment Account as described. 



ANALYSIS OF TRANSACTIONS (l) 
GENERAL LEDGER ADJUSTMENT ACCOUNT. 



51 



1918. 




£ 


s. 


d. 


1917. 


£ 


s. 


d. 


Dec. 31 


To Cash . . 


274,675 






Dec. 31 By Balance . 


24,220 








,, Discount . 


618 


_ 


— 


1918. 










,, 


„ Returns & Allowances 


1,122 


- 


- 


Dec. 31 


„ Sales 


286,135 


- 


- 




„ Bad Debts 


179 




_ 




„ Cash 


322 


— 


_ 


,, 


„ Bills Receivable 


345 




_ 












„ 


„ Transfers 


1.320 




- 












n 


„ Balance . 


32,418 


- 


- 


1918. 












310,677 


- 


310,677 


- 


- 


























Dec. 31 


By Balance 


32,418 


- 





The creation of an account in this form in the Debtors' Ledger 
gives complete double entry throughout. Inasmuch as the account 
is virtually a duplication of that in the General Ledger, there appears 
no great practical advantage in its construction. 

Reverting to the consideration of the alterations required in the 
books of first entry to enable them to furnish conveniently the 
information required for the purpose of construction of controlling 
accounts, the Cash Book will have to be adapted so as to give the 
necessary classification of entries. 

CASH BOOK. 



Dr. 










































Date. 


Particulars. 


Fo. 


Disc'nt. 


Cash. 


Bank. 


Debtors' Ledgers. 


A. 


B. 


C. 













































Cr. 



Date. 



Particulars. 



Fo. Discount. 



Cash. 



Bank. 



Creditors* 
Ledgers. 



Debtors' 
Ledgers. 



Note. — Discount plus Cash or Bank, giving a total of the amount posted, 
is extended into the appropriate Ledger column. 

The number of columns in the example given is probably as 
many as can conveniently be operated through the medium of one 
Cash Book. It will be observed that, for reasons of space, no analysis 
column is provided on the debit side for Creditors' Ledger items; 
these will have to be posted to the Adjustment Account for that 
Ledger in detail; while, on the credit side, one column only is provided 
for the Debtors' Ledgers; items appearing therein will require to be 



52 



ACCOUNTING 



analysed as between the Ledgers affected to give the totals for each 
Adjustment Account. 

When analysis is required over a greater number of Ledgers than 
is indicated by the form given — this will apply more usually to 
cash receipts rather than payments — ^it will probably be more 
suitable to record the amounts received in a Sales Cash Book, the 
totals of which will be carried daily to the General Cash Book. 
Analysis may then be made in the Sales Cash Book and will be 
accomplished the more conveniently in that this book, being distinct 
from the General Cash Book, will be available for purposes of posting 
more freely than the main Cash Book. 



SALES CASH BOOK. 



Date. 



Particulars. 



Fo. 



Discount. 



Amount. 



Ledger A. 



Ledger B. 



Ledger C. 



Notes. — The columns headed " Discount " and " Amount " will be closed 
daily in red ink, as totals are transferred to the General Cash Book. Irres- 
pective of the red-ink daily totals, additions will be carried forward of all 
columns to the end of each month, in order that the prima facie accuracy of 
the analysis may be tested by cross-addition. 

The remaining entries appearing in the pro forma Adjustment 
Account set out are such as would appear in the Ordinary Journal. 
This may likewise be ruled in form suited to assist analysis of 
entries — 

JOURNAL. 



Dr. 
















Debtors* Ledgers. 


i 
Creditors' 
Ledger, 


General 
Ledger. 


Fo. 


Date. 


Particulars. 


A. 


B. 


C. 





















Cr. 



Particulars. 



I Fo. 



General 
Ledsrer. 



Creditors 
Ledger. 



Debtors' Ledgers. 



B. 



Note. — Debits to Ledger accounts are entered in the appropriate columns 
on the debit side; credits similarly on the credit side. 

In the pro forma account set out, Journal entries appear in totals 
as they relate to Bad Debts, Bills Receivable, Transfers, etc. With 
the form given, they would appear as totals, debit and credit. 



ANALYSIS OF TRANSACTIONS (l) 53 

The method of construction of an Adjustment Account in relation 
to a Debtors' Ledger has served to illustrate the general principles 
involved and these have application in regard to similar accounts 
for Creditors' and any other Ledgers. Thus, in respect of Creditors, 
the Purchase Journal totals must be dealt with in the Adjustment 
Account, and, where more than one such account is to be kept, 
an alteration in the ruHng of the Journal may be required. 

The Slip system of record in respect of Sales Invoices can be 
operated in conjunction with a system of sectional balancing 
without difficulty. 

As an illustration of a method that might be adopted, the following 
is given. The invoices would be made out in the usual way, but 
in three copies, all of which would bear the same number. One 
of these would be left in the Invoice Book, to be subsequently 
detached upon being sent to the customer; another would be passed 
to the clerk in charge of the Sales Dissection Book; the third to the 
Ledger clerk, thus enabling him to post to the proper account from 
an original record. 

The Sales Dissection Book would be in the general form of an 
ordinary Sales Day Book, except that it would probably be necessary 
to enter only the Date, Number of Invoice, Total Amount, and 
Classification of the entry under the proper Ledger heading. As the 
number of the invoices would run consecutively, and should be 
written up in the Sales Dissection Book in this order, no difficulty 
should occur in seeing that all invoices are accounted for. 

The Sales Dissection Book clerk will, on the receipt of the first 
copy, fill up the Total Amount column. The Ledger clerk will post 
from his copy to the account affected, record the posting folio and 
Ledger upon the copy and hand it to the Sales Dissection clerk. 
The latter will fill up the analysis columns of the book under his 
charge, and when all invoices have been posted and classified, the 
additions of the Sales Dissection Book should establish its accuracy. 

The chief causes of error in a system of this nature lie in the 
ordinary risks of mistake in posting, and of incorrect classification 
in the Sales Dissection Book (see page 54). 

The use of the Shp method in conjunction with a system of 
sectional balancing is usual with banks. The method of employing 
the paying-in slip as the basis of record has already been referred 
to in part, so far as it affects the Receiving Cashier's Cash Book, 



r 



o o 
< 



. o 
o > 

iz; = 



O 3 
O o 



54 



ANALYSIS OF TRANSACTIONS (l) 



55 



the Journal, and the Current Accounts Ledger. It also serves a 
further purpose in forming the basis of entry in the Check Ledger 
Credits Book, in the following or some similar form — 



CHECK 


LEDGER CREDITS (CURRENT ACCOUNTS) BOOK 


« 






Name. 


1 
Total 
Credit. 

1 


Ledgers 


Ledgers 
E-J 


Ledgers 
K-O 


Ledgers 
P-S 


i^f- 




j 
1 










1 


















j 







By means of the entries in this book, the total of which will agree 
with the Journal, complete analysis of Ledger credits can be obtained. 

Similar methods will be employed in regard to Ledger debits, 
customers' cheques forming the slip in this instance. 

A variation of the methods described, depending largely upon an 
analysis of each transaction, is occasionally adopted, and is here 
described in its appHcation to the Creditors' Ledger of a trading 
concern. 

Each payment affecting an account in the Creditors' Ledger is 
first entered in the Bought Ledger Payments Book, which is incor- 
porated in the General Cash Book by transfer of totals at monthly 
or other intervals. The operation of the former book may best 
be considered in relation (say) to the cash payments debited to the 
following Ledger account — 

A. B. 



1919. 




f. 


J. 


d. 


1918. 




i 


5. 


d. 


Feb. 24 


To Cash & Discount 


462 


10 


- 


Dec. 31 


By Balance 


362 


10 


— 


Mar. 22 


„ Do. do. . 


137 


10 


— 


1919. 












„ Returns .... 


4 


10 


- 


Jan. 31 


By Goods .... 


242 


- 


- 


July 29 


„ Cash and Discount . 


116 


- 


- 


May 8 


„ Do 


116 


- 


- 


Oct. 20 


„ Cash .... 


83 


— 


— 


Aug. 31 


„ Do- . 


83 


— 


— 


Dec. 31 


„ Balance .... 


123 


8 


~ 


Nov. 24 


„ Do 


123 


8 


- 






926 


18 








926|l8 


_ 








■= 


'=" 


1919. 






"""" 












Dec. 31 


By Balance 


123 


8 


— 



The entries, in respect of the amount paid and discount received, 
will be made in the Bought Ledger Payments Book and posted 
to the Ledger in the ordinary way. The nature of the payment 
is analysed in the columns headed: "Returns," "Current 
Period's Purchases." and " Old Balance." 



56 



ACCOUNTING 



The exact method of operation adopted in regard to the entries 
set out should be considered in reference to the account below. 



BOUGHT LEDGER PAYMENTS' BOOK. 



Date. 


Name. 


Fo. 


Discount. 


Amount 
paid. 


Returns. 


Total. 


Current 
P'chases. 


Old 
Balance. 


1919. 
Feb. 24 
Mar. 22 
July 29 
Oct. 20 


A. B. . . 
Do. . . 
Do. . . 
Do. . . 




^2 
5 
4 


s. 
10 
10 


d. 


/ 
450 
132 
112 

83 


s. 


d. 


4 


s. 
10 


d. 


4 

142 
116 
83 


s. 
10 


d. 


142 
116 
83 


s. 


d. 


4 


s. 
10 


d. 



The total of the " Amount Paid " will be closed in red ink and 
entered in the Cash Book periodically, but for the purposes of check 
upon the classification made in the remaining columns, the additions 
will be continued without break until the end of the financial period. 
The Creditors' Ledger balances, when extracted, will be analysed 
in similar manner to show in respect of each the portion represented 
by- 

Balances brought forward at previous *' balance," 

Current purchases, and 

Returns. 

The following tests can then be made — 

(1) The total purchases of the current period as shown by the 
Day Book should equal the total of the columns headed " Current 
Purchases " in the Bought Ledger Payments Book and the Balances 
Book. 

(2) The returns can be similarly proved. 

(3) The balances outstanding at the end of the previous period 
should be accounted for by the total of cash paid and discount 
received in respect thereof, plus the amount still owing as appearing 
from the Balances Book. 

Thus the three classes of items. Balances brought forward, Current 
purchases, and Returns, of which each outstanding balance must 
be made up in whole or part, are checked, and should error then 
appear to exist upon adjustment of the Creditors' Ledger according 
to the usual method of sectional balancing, it is proved by inference 
to have occurred either in posting or in the additions of the Ledger 
accounts. 



CHAPTER VI 

ANALYSIS OF TRANSACTIONS (II) 

In the previous chapter, the uses of the methods of analysis of entries 
for the purposes of sectional balancing were discussed. Another 
form of analysis, which aims at a classification of transactions 
according to their nature, irrespective of the Ledgers in which they 
may be recorded, has yet to be considered. The object in view 
in the latter case is the summarisation of entries in such manner 
as will show the total of the dealings of a particular class relating 
to some particular section of the business operations. Thus, the 
item of Sales may be so analysed as to show the total under more 
than one heading, and the classification may extend further and be 
so applied as to provide for a complete analysis of all gains and 
losses attributable to any particular branch or department of 
trading. 

This method of analysis will be effected by the use of books of 
first entry in columnar form. 

If a particular class of transactions, e.g., Sales, is considered, it 
is clear that the form of the Sales Day Book is precisely the same, 
whether it be adapted for the purposes of sectional balancing, or of 
statement of the credit side of the Trading Account under a number 
of headings. 



RULING OF SALES DAY BOOK FOR PURPOSES OF SECTIONAL 
BALANCING. 



Date. 



Name. 



Fo. 



Total. 



Ledger A. 



Ledger B. 



Ledger C. 



Etc. 



RULING OF SALES DAY BOOK WITH CLASSIFICATION FOR 
DEPARTMENTS. 



Name. 



Fo. 


Total. 


Iron- 
mongery. 


Brass- 
ware. 


1 Enamell* 
ware. 






















1 
1 





Etc. 



57 



5— (1377) 



58 



ACCOUNTING 



The two forms of analysis may be combined without difficulty, 
as in the following form — 



Ledger 
A. 



Ledger 
B. 



Ledger 
C. 



Date. 



Fo. 



Total. 



Iron- 
mongery 



r 



Brass- 
ware. 



Enam'ld 
ware. 



The entries appearing in the Total column will be classified twice, 
first, according to the nature of the Sales, secondly, according to the 
Ledgers containing the personal accounts to which they are posted. 
The advantages of both methods of analysis are thus given. 

The use of tabular books in general presents no great difficulty 
to the student. The commonest form is probably that of the 
Cash Book ruled with three columns on either side, for Discount, 
Cash and Bank. 

In particular cases, it may be desirable to adopt a form of Cash 
Book containing several columns on either side in which to record 
particular classes of receipts and payments. The use of a special 
column for receipts from Cash Sales, for example, may be provided 
for, and the principle involved may be extended to any number of 
columns desired. The development of the method of analysis 
in this way is made usually with a view to convenience, and ceases 
to possess advantage only when the number of columns in which the 
classification is made becomes such as to render it difficult to operate 
with accuracy, or the volume of entries affecting any particular 
column is too small to justify its use. 

In the case of a business in which but a short period of credit is 
obtained and given, it may sometimes be desirable, from the point 
of view of simplicity, to operate the system of accounting upon a 
purely cash basis, maintaining a concurrent record, usually in 
memorandum rather than in account form, of outstanding debts 
and liabilities, but introducing these into the accounts only as and 
when a complete Balance Sheet and Profit and Loss Account are 
prepared. In such cases, the analysis of gains and losses is made 
mainly through the Cash Book and its subsidiaries. For purposes 
of illustration, the general features of a system of accounting suitable 
to a hotel may be briefly considered. The Cash Takings are banked, 
and passed from the Cash Book to the credit of Cash Takings 



ANALYSIS OF TRANSACTIONS (ll) 



59 



Account. Payments of all kinds, made so far as possible by cheque, 
are debited to a Trade Payments Account. At the close of any 
financial period, when a Balance Sheet and Profit and Loss Account 
are drawn up, it will (as stated) be necessary to make allowance 
for outstanding book debts and Habilities. In order, however, that 
the gains and losses, when adjusted, may be set out in proper 
detail, it is necessary that an analysis of Cash Takings and Trade 
Payments be made. This will be obtained by means of a summary 
of the classification given in the Day Book-Ledger (in regard to 
Takings) and in the Trade Payments Book (in regard to expenses, 
assets acquired, and liabilities discharged). 

FORM OF HOTEL DAY BOOK. 



*0 a> 

B2 



^r=^ 






Kitchen. 



Cellar. 



Sundries. 



Note. — ^The totals can be confirmed by the cross-additions. 

The main Cash Book will record day by day the total " Amount 
paid,** which will correspond with the amount banked. The Day 
Book will be summarised for the period and the results of the 
summary may be expressed in the following formula — 

Debts at commencement, plus 

Debits, plus 

Miscellaneous Receipts (BilHards, etc), 
equal 

Cash paid, plus 

Debts at end. 

The form of the Day Book permits of an analysis of the debits 
and miscellaneous receipts, which together constitute the true 
earnings of the period. 



60 ACCOUNTING 

At the end of the financial period, Cash Takings Account will be 
debited with the total of the earnings arrived at by analysis of the 
Day Book, and sundry accounts (Apartments, Kitchen, Cellar, 
BiUiards, etc.) credited. The effect of this entry is to leave at the 
debit of Cash Takings Account an amount equal to the total of 
the column in the Day Book headed " Balance carried forward,'* 
this being so inasmuch as the book debts outstanding must represent 
the difference between the amounts charged up to visitors, and the 
cash received from them. 

In regard to payments, it has been stated that the method of 
accounting will be to charge all payments, in the first place, to Trade 
Payments Account. The debits upon this account will be analysed 
in a Trade Payments Book, as shown on the opposite page. 

Every pajmient will thus be classified under the proper heading. 
At the end of the financial period, the analysis will be continued with 
the addition of the outstanding liabihties, set out in the various 
columns. 

The total of the actual payments, plus liabilities outstanding, 
will then be credited to Trade Payments Account, and debited to 
the accounts for the headings given, thus leaving at the credit of 
the first-named account, a balance equal to the amount of the 
liabihties, of which the Trade Payments Book will show the details. 
It should be observed that Cash Takings and Trade Payments 
Account will stand debited and credited respectively with the book 
debts and liabilities coming forward from the previous period. 

The entire system of accounting has thus been operated on a cash 
basis through the medium of Cash Takings and Trade Payments 
Accounts. A complete analysis of the entries upon these accounts 
is secured in the manner described, and this, with the addition and 
classification of the outstanding book debts and liabilities, renders 
possible the preparation, not only of an accurate Balance Sheet, 
but of a Profit and Loss Account containing full particulars of all 
gains and losses. 



When the volume of transactions to be recorded requires the use 
of subsidiary Cash Books to a considerable extent, the General 
Cash Book will consist, mainly and perhaps entirely, in a record of 
totals, as in the following — 



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62 



ANALYSIS OF TRANSACTIONS (ll) 



63 



The use of the tabular form in connection with Ledgers will 
involve an apparent departure from principle in the fact of 
combination of Day Book and Ledger, as in the case of the Hotel 
Day Book referred to. 

In connection with the Slip system, it has already been suggested 
that where simple transactions on various personal accounts have 
to be recorded, the opening of accounts in a bound Ledger may be 
laborious and inconvenient. These conditions would apply in the 
case of a Gas or Electric Lighting Company, or a Hotel, or similar 
concern, to which individuals become indebted occasionally or 
periodically in varying amounts. It is clear that in these circum- 
stances the opening of numerous personal accounts, the great 
majority of which would remain open for a comparatively short 
space of time, would be inconvenient. The adoption of a suitable 
form of Day Book-Ledger would, however, give the full advantages 
of record of debts outstanding, while not rendering necessary the 
keeping of a separate set of Ledger accounts. 

In the following form, the entries upon the personal accounts 
(i.e., opposite the various names) concern more than one transaction, 
and the balance is not carried forward until the end of the year, 
in this respect differing from the form of Day Book- Ledger appHcable 
to the accounting system of a Hotel as already given. 



FORM OF DAY BOOK-LEDGER SUITABLE FOR A GAS COMPANY 







1st 


Qr. 


2nd Qr. 


3rd Qr. 


4th Qr. 
















ll 


il 
ml 


to 
a 

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a 
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42 

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s 




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Note. — Several amounts may appear in the " Amounts Paid " column' 
and about 3 or 4 lines should be left for each name. The use of a book of 
sufficient width will enable it to be continued for several years, and the 
provision of extra space will permit of fresh names being inserted upon changes 
occurring. The amount to be credited to Revenue Account will be the total 
of " Total Debits during Year," while " Allowances, etc.," will be debited 
to the same account; the balances outstanding will thus be brought into 
account. 



64 ACCOUNTING 

The form given is suitable to Gas and Electric Light Companies, 
the Rent Accounts of an Estate, Rates Accounts, Subscription 
Accounts of Clubs, etc., and the like. All these possess the common 
feature that the transactions are entered into at regular intervals 
with a numerous class of persons whose individual person- 
ality is substantially the same from one trading period to another. 
The number of Ledger accounts which would have to be kept under 
the theoretical system of book-keeping would be so great as not 
only to involve much labour, but probably considerable difficulty 
in balancing. 

By the form given, no differences in the Trial Balance can arise 
from error in the postings from the Journal to the Ledger accounts, 
for each entry opposite a name of itself forms a record upon the 
Ledger account, and at the same time furnishes the items which, 
with the other amounts charged, in total represent the value of the 
credit to the nominal account. 

In summary, it has been indicated that the basis of any method 
of analysis by means of tabular books lies in the classification of 
entries either according to the Ledgers containing the accounts 
affected by them, or according to the nature of the transactions as 
such. In regard to the latter, it has been indicated, also, that by the 
adoption of an adequate system of classification, the gains and losses 
may so be collected under separate headings or accounts as to furnish 
a complete statement of trading results arising from any special 
section of the business. This particular form of analysis is the 
subject of further consideration in relation to Consignment Accounts, 
Departmental Accounts, Branch Accounts, etc. 



CHAPTER VII 



AGENTS' ACCOUNTS 



The conditions affecting agencies are so various that it is not 
possible to consider all the methods of accounting by which the 
financial transactions relating to them may be controlled. An 
agent may be merely an intermediary in an isolated transaction; 
or, occupied periodically or continually in soliciting orders only; 
or similarly engaged with power to collect book debts; or, again, 
employed in the management of what virtually constitutes a 
branch of the main business, under general or partial supervision 
and direction. In these varying circumstances the system of 
accounting must be suited to each particular case. 

Problem. An agent for a Fire Insurance Company receives 
from the Head Office a quarterly list of renewal premiums due, 
amounting to £80. He collects £70 in respect of those renewed, 
while the balance is not paid, and the policies affected lapse accord- 
ingly. During the quarter, fresh insurances are effected by him, 
in respect of which the premiums are £35, which he duly receives. 
The agent's commission is 15 per cent, on all premiums collected, 
with an additional 5 per cent, on new premiums. After deduction 
of commission due, he remits the balance in his hands. Draw up 
the necessary accounts in the agent's books. 

RENEWAL PREMIUMS. 



To Head Office, quarterly 
renewals 



I 

80 


5, 


d. 


80 

' ' ' 


_ 


z 



By Cash 
„ Head Office. 



lapses 



10 


s. 


d. 


80 


- 


„ 



NEW PREMIUMS. 



To Head Office 



351 _! _ By Cash 



s.\d. 



65 



66 



ACCOUNTING 



To Balance 



COMMISSION. 



1710i - 



17,10 



i I 1 



By Head Office — 
15 % on ;^105 
5 % on ;^35 



By Balance 



i 

15 
1 


s. 

15 
15 


d. 


17 


10 


- 


17 


10 


_ 



To Renewal Premiums, 



Commission 
Cash 



HEAD OFFICE. 



15 



By Renewal Premiums 
,, New Premiums . 



! io 

' 35 


5. 


d. 


US 


~ 


- 



CASH. 



To Renewal Premiums 
„ New do. 



To Balance 



35 


s. 


d. 


105 


To 


- 



By Head Office 
,, Balance . 



1 87'l0 
i ^710 


d. 


1 105; - 

i r 


- 



In the case illustrated, the agent is entrusted with the collection 
of amounts due. Where he acts simply as an agent, as, for example, 
in the case of a traveller engaged in soliciting orders, he is concerned 
financially only with the amount of commission earned by him, 
and his system of records may be limited accordingly. 

It has already been suggested that the nature of the transactions 
and the relationship between principal and agent may be such as 
to place the latter in what is virtually the position of manager of 
a branch business. This would usually apply (for example) where 
the agent is abroad, receiving goods despatched to him at regular 
intervals for purposes of sale, and entrusted with the collection of 
accounts and payment of expenses, the direct control of the 
principal being necessarily limited. 

The following set of accounts illustrates generally the method 
of book-keeping in these circumstances. 



AGENTS ACCOUNTS 



67 



I. Agent's Books- 



Dr. 



To Head Office Account, 

value of goods received 2,000 
„ Head Office A/c, profit . 400 



TRADING ACCOUNT. 

£ 



2.400 



By Sales . 
„ Stock on hand 



Cr. 



£ 

,800 
600 



2.400 



To Trading A/c 



STOCK. 



£ 

600 



To Cash 



EXPENSES. 

By Head Office 



£ 

300 



£ 

300 



HEAD OFFICE ACCOUNT. 



To Cash 
,, Expenses 



1,000 By Trading A/c, goods in- 



300 



Balance carried down . 1,100 



2.400 



voiced 
Trading A/c, profit 



2.000 
400 



2,400 
By Fa? ce brought down . 1.100 



DEBTORS 



To Trading A/c, Goods sold 1,800 



1.800 



To Balance brought down . 300 



£ 

By Cash .... 1,500 
.. Balance carried down . 300 



1,800 



To Debtors 



CASH. 



£ 

1.500 



1,500 



To Balance brought down . 200 



£ 

By Expenses . . . 300 
„ Head Office, cash remit- 
ted . . . . 1.000 
„ Balance carried down . 200 

1,500 



ACCOUNTING 



II. Head Office Books — 

In the books of the Head Office, the transactions relating to the 
agency might be expressed thus — 



AGENCY ACCOUNT. 



£ 

To Goods, value invoiced . 2,000 
,, Profit and Loss A/c, net 

profit . . .100 



2.100 
To Balance brought down . 1,100 



I 
By Cash .... 1.000 
,, Balance carried down . 1,100 



2,100 



The account stated in this form, however, does not show the 
exact composition of the balance of indebtedness of £1,100, and 
the method now illustrated is preferable. 



AGENCY GOODS ACCOUNT. 



To Goods, value invoiced . 2,000 
,. Profit and Loss A/c, 

gross profit . . 400 


By Agency Debtors, Sales . 
,, Stock on hand 

3 


i 

1,800 

600 


2,400 


2,400 


To Stock on hand . . 600 






AGENCY DEBT 


ORS ACCOUNT. 




To Agency Goods A/c . . 1,800 


By Agent, Current A/c, cash 

collected . 
,, Balance carried down . 


I 

1,500 
300 


1,800 


1,800 


To Balance brought down . 300 






AGENCY CURR 


ENT ACCOUNT. 




I 
To Agency Debtors, cash 

collected . . .1,500 


By Profit and Loss A/c, 

Expenses . 
„ Cash .... 
,, Balance carried down . 


i 

300 

1,000 

200 


1.500 


1,500 


To Balance brought down . 200 







AGENTS ACCOUNTS 69 

By the second and more detailed system of accounts, it is clearly 
shown that the total amount of £1,100 representing the investment 
of the Head Office in the Agency, is accounted for by — 

Stock 600 

Debtors 300 

Cash .200 

1.100 



The value of this latter method lies in the greater degree of check 
which it affords over the agency transactions. It is necessary, of 
course, that the nature of the returns made to the Head Office 
should be such as to enable the transfers to be made in the Head 
Office Books between Agency Goods Account, Agency Debtors 
Account, and Agency Current Account. The returns required 
for this purpose would be copies in detail of all sales and of the cash 
transactions. In addition, periodical lists should be forwarded 
showing details of the stock on hand, and of book debts outstanding, 
including in the latter particulars of the date when each debt was 
incurred, and, in regard to the balance of the Cash Book, a certificate 
of the local bank stating that the amount appears to the credit of 
the agency. 

In the transactions dealt with, it has been presumed that the 
goods invoiced to the agent have been charged at cost. It is some- 
times preferred to debit them at a price in excess of cost, or even 
at selling values. It would in either case be incorrect for the 
transactions to be treated by the Head Office as sales, and the 
amounts should be credited, not to Sales Account but to a Goods 
sent to Agency Account. From the latter account, there should be 
transferred to Trading Account at the end of the period that pro- 
portion of the amount originally credited, whether at cost or selling 
value, which is attributable to the goods actually sold by the agent. 



CHAPTER VIII 

CONSIGNMENT ACCOUNTS 

The consideration of Consignment Accounts may conveniently 
be divided into the systems of accounts relating to Outward and 
Inward Consignments respectively. 

Consignments Outward. 

These are usually recorded in a form somewhat similar to 
Agents' Accounts. Each consignment, however, is treated sepa- 
rately so as to show its result, in profit or loss, apart from other 
transactions. The method of book-keeping must, therefore, be 
arranged to charge the particular Consignment Account with full 
cost and expenses attributable thereto, and give to it full credit 
for the proceeds of sale. 

It has already been indicated that, in regard to Agents' Accounts, 
particularly where the agent and principal are not in close touch 
with each other, it is not unusual to invoice the goods at a definite 
value. This is frequently in excess of cost, and may represent the 
minimum which the agent is expected to realise or the value 
of a bill drawn on the agent against the goods. 

The despatch of the goods on consignment is not equivalent to 
sale and the transaction should not be treated as such, nor should 
profit be taken as earned until an actual sale has been made by the 
consignee and notified to the consignor. 

Problem. Messrs. A. B. & Co., London, despatch goods (which 
have cost £300) to Messrs. G. & Co., Melbourne, and invoice the 
goods to them at the value of £338. A. B. & Co. pay Insurance, 
Freight, and Shipping Charges, £20, and draw on G. & Co. for £280 
at 30 days' sight. The documents of title are sent forward under 
care of the Bank of Australasia, Ltd., who discount the bill at 5 
per cent, per annum. In due course, G. & Co. forward Account Sales, 
showing gross proceeds realised at £440, and expenses incurred £25, 
in addition to 5 per cent, commission on the proceeds. G. & Co. 
forward sight draft on London for the balance. Give all necessary 
accounts. 

70 



CONSIGNMENT ACCOUNTS 



71 



GOODS SENT ON CONSIGNMENT ACCOUNT. 



To Trading A/c (cost) . 
„ Profit and Loss A/c, 



i 

300 

73 



373 



By G. & Co., Melbourne. 

Consignment A/c 
„ G. & Co., Melbourne, 

balance profit . 



338 



35 



373 



G. & CO., MELBOURNE, CONSIGNMENT ACCOUNT. 



To Goods sent on Consign- 
ment A/c 

„ Cash, Freight, Insur- 
ance, etc. 

„ G. & Co., Storage, 
Landing Charges, 
etc. . . . 

,, G. & Co., Commission 
@ 5%. 

,, Goods sent on Con- 
signment A/c (profit) 



i i 


s. 


d. 


338 - 

j 




' 20 




- 


[1 

; 25 

II 


- 




; 22 


- 


- 


; 35 - 


~ 


i 440 -i - j 




=— 


-i 



By G. & Co., draft . 
„ G. & Co., balance 



I! ^ I ^• 

I 280 - 
160; - 



i 440 - 



G. & CO. 



To G. & Co., Consignment 

A/c (draft) . 
Do. do. 



! ^ 

i 280 

{ 160 

ll 


s.d, 

i 

_!_ 
1 


440 


J-; 



By Cash, per Bank of 
Australasia, Ltd. 

„ Discount . 

„ G. & Co., Consignment 
A/c, charges paid . 

,, Do. do. commission 

„ Cash, per Bank of 
Australia, Ltd. 



440 - 



8 



I 
27816 

V 

25! - 

113: - 



In regard to the account headed " Goods sent on Consignment," 
a credit balance appearing thereon does not necessarily represent 
a profit, but may be merely the difference between cost and invoiced 
value of goods not yet sold, and be set off by the amount at the 
debit of the Consignment Account. 



72 



ACCOUNTING 



A shorter way of expressing the transactions dealt with would 
be by the preparation of an account as follows — 

G. & CO., MELBOURNE, CONSIGNMENT ACCOUNT. 



To Goods 

,, Cash, Freight, Insur- 
ance, etc. 
,, Profit & Loss, profit , 



300 


s. 


d. 


20 
73 


~ 


- 


393 - 


- 



By Cash, draft discounted 
,, Discount . 
,, Cash, sight bill . 



I 


5. 


d. 


278116 8 


1 


3 


4 


113 


~ 


~ 


393 


_ 


_ 


' ■■ . 


=. 


ass 



This latter method, however, does not give the detail necessary 
to show the history of the transactions recorded, and the earlier 
form is therefore to be preferred. 

Consignments Inward. 

The system of accounting in respect of Consignments Inwards 
may best be explained by setting out such transactions relative to 
the problem previously stated as would affect the consignee and 
in the form in which they would appear in his books. 

The receipt of the goods does not of itself constitute a liability, 
and therefore may be recorded by a memorandum in the statistical 
books (i.e., outside the books of account). 



A. B. 


& 


CO.. LONDON. 








To Cash, per Bank of 
Australasia, Ltd. . 


280 


s. 


d. 


By X.Y.Z. (for goods sold) 


io 


5. 


d. 


„ Cash, Landing Char- 
ges, etc. 

„ Cash, Storage . 
„ Cartage . 

„ Commission Account . 


1^ 

10 
22 


_ 


_ 










„ Bank of Australia, 




- 












Ltd., purchase of 
sight draft 


113 


- 


- 












440 


- 


- 


440 


- 


- 



The account in the above form follows what is perhaps the more 
usual system of record, by which the receipt of the goods is evidenced 
merely by memorandum, and the entries in the books are limited 
strictly to financial transactions with or for the account of the vendor. 

It is sometimes preferred to record the invoice value of the goods 
received in the form of entries upon Ledger accounts, which will be 



CONSIGNMENT ACCOUNTS 



73 



accomplished (in the particular case under consideration) by 
debiting a Goods Received on Consignment Account with £338, 
and by crediting a Consignment Credits Account with a similar 
amount. Upon the sale of the goods, or any part of them, an entry 
will be necessary, crediting the former and debiting the latter 
account with the full invoice value, or, as the case may be, with 
that proportion of the amount of the original entry estimated to be 
represented by the amount sold. This method may be thought 
more in accordance with theoretical principles, but, as stated, the 
receipt of goods by a consignee does not of itself necessarily con- 
stitute a *' transaction '* in a book-keeping sense, and there is 
therefore no objection to the record of the goods by memorandum 
only. 

Consignments Journal. 

The accounts illustrated in regard to Inward Consignments have 
involved a distinct entry upon the Consignment Account for every 
transaction arising out of each lot of goods consigned. These, 
however, possess the same general character and it is obviously 
desirable, if possible, that a systematic method of record in respect 
of them be adopted. This may be arranged as follows: Full 
particulars of each parcel of consigned goods should be entered in 
a Consignment Journal in the form of a memorandum and without 
values. (See page 74.) The sales will be entered in a Sales Day 
Book ruled as under — 



FORM OF SALES DAY BOOK. 



Date. Name. 



Particulars. 



Fo. 



Total. Own Sales. C.J. Fo. ^°^f 



Sales. 



It is immaterial, from the point of view of the consignor, to whom 
the goods may be sold, and there is no objection to the record of 
the sales in the ordinary Sales Day Book, nor to the amounts being 
posted to the debit of some personal account in the ordinary Sales 
Ledgers. The credit for the total, however, should be made with 
distinction as to the nature of the goods sold, and both Own Sales 
and Consignment Sales Accounts should be credited with the due 
proportions of the periodical totals attributable to each heading. 

&— (1377) 



S-2! 









S5g- 






§2 

Oi 



74 



CONSIGNMENT ACCOUNTS 75 

The full amount of the sales of consigned goods will thus be 
credited to Consignment Sales Account. It is necessary, however, 
that the individual consignors' accounts be credited with the 
proceeds of their goods. The detail entries in the Consignment Sales 
column of the Sales Day Book are therefore repeated in the Details 
column of the Consignment Journal; with this difference, however, 
that in the latter they are grouped in order of date against the entry 
for the particular lot of goods to which they relate. (It is 
desirable that under the particulars first recorded sufficient space 
should be left to enable all sales in respect of each consignment 
to be grouped.) When the full value of any parcel of goods has been 
realised and the entries contained in the Sales Day Book have been 
written up in the Consignment Journal, the " Details " column 
in the latter should be closed by extension into the " Total " column. 
It is obvious that when this has been done the addition of the 
" Total " column will agree with that of the " Consignment Sales " 
column in the Sales Day Book for the like period. 

The gross proceeds of each consignment is also represented by the 
addition of the figures appearing under the headings Net Proceeds, 
Freight, Charges, Insurance, Commission. Consignment Freight 
and Consignment Charges Accounts (which will be contained in the 
Private Ledger) will have been debited with all outgoings under these 
headings. There will be entered against the record of each con- 
signment in the Consignment Journal amounts of this nature which 
are to be deducted from the proceeds. Insurance may be the 
amount of expenditure incurred, or, where the consignee takes the 
risk of loss, be, like Commission, a profit charge. 

The entry of all amounts to be brought into account against the 
gross sales in the columns numbered 4 to 7 inclusive enables the 
balance, or Net Proceeds, to be calculated and filled in. 

The entries then necessary to be made may now be considered. 

Consignment Sales Account has already been credited with the 
total sales of consigned goods. The amount appearing to credit 
of this account should agree with the final addition of the '* Total '* 
column in the Consignment Journal, when closed; which, again, 
should equal the total of columns (3) to (7). 

In place of crediting a consignor with the gross sales, and of 
debiting the Freight, Charges, Insurance, Commission (as under 
the system previously illustrated), the principle of double entry 



76 ACCOUNTING 

is secured by making entries upon the various Ledger accounts, in 
the form of the following Journal entry — 

Consignment Sales A/c Dr. 

To Sundries 
Sundry Consignors 

(for net proceeds of consignments) 
Consignment Freight 

(for total of freight recovered) 
Consignment Charges 

(for totals 'of charges recovered) 
Insurance A/c 

(for total earned) 
Commission A/c 

(for total earned) 

The total of the *' Total " column will thus be debited to Consign- 
ment Sales Account, clearing this account. The net proceeds of 
each consignment will be credited to the consignors concerned, 
while the remaining accounts stated in the entry above will be 
credited in total. Consignment Freight and Consignment Charges 
Accounts will be cleared, all debits against these accounts having 
been set out in the proper columns of the Consignment Journal, 
while Insurance and Commission Accounts will show the total 
earned under these respective headings. 

Under the system described, the entries upon the personal 
accounts of the consignors will be limited to credits for the Net 
Proceeds due, and debits for the amounts paid, while the full 
particulars of the transactions in respect of each consignment will 
be set out in the Consignment Journal and be available for reference. 



CHAPTER IX 

DEPARTMENTAL ACCOUNTS 

The Profit and Loss Account, in its ordinary form, furnishes a 
summary of gains and losses of a business as a whole, while a system 
of Departmental Accounts aims at the preparation of distinct 
statements for each of a number of departments. This involves 
an analysis of trading transactions, for which purpose the use of 
books in tabular form, as already illustrated, will be of advantage. 
The analysis, to be effective, must be complete and must be such 
as to allocate on a departmental basis all items of gain or loss. So 
far as concerns transactions with the outside world, this presents 
as a rule no great difficulty, but it may be necessary, for the purposes 
of more accurate determination of departmental results, to bring 
into account the results of internal or inter-departmental deaUngs 
also. A company carrying on a business of general furnishers and 
decorators may, for example, receive orders concerning the depart- 
ments specifically concerned with furnishing, decorating, plumbing, 
etc.; the transactions affecting the furnishing department may 
involve further deahngs between that branch of the business and 
its factory. To arrive at the net result for the business as a whole 
is, in such a case, not enough, for the ascertainment of departmental 
profits is obviously important. Due record must therefore be kept 
of inter-departmental transactions. Such dealings may not 
involve transfers of value, but be undertaken rather with the aim 
of economy of expenditure. This may best be illustrated by example. 
A firm of Provision Merchants, following the usual custom of 
trade, imports large quantities of goods, depositing them in cold 
store until sale. The heavy expenditure under the heading of 
Cold Store Charges leads them to erect within their premises their 
own cold store, and they incur charges accordingly for Electric 
Power, Engineer's Wages, Repairs, Depreciation of Machinery, etc., 
in place of the expenditure formerly paid to cold storage companies. 
The latter, however, owing to the conditions in regard to hypotheca- 
tion of part of the stocks to banks, etc., which involve storage 
according to the terms of hypothecation, are not entirely wiped out, 

77 



78 



ACCOUNTING 



but very substantially reduced. So far as charges are incurred to 
cold storage companies, they will as before be debited to Cold 
Store Charges Account, while Cold Store Working Account will 
be debited with the new items of expense referred to. The firm's 
cold store will be regarded as a profit-earning department, and its 
earnings will be arrived at by a calculation of the rent earned, 
according to the rates payable to cold storage companies, on the 
goods deposited in store. The total of these earnings will be credited 
to Cold Storage Working Account and debited to Cold Store Charges 
Account. The latter account is, therefore, constructed in such a 
way that it gives a true comparison year by year of the expenses 
under this head, while it can be seen from Cold Store Working 
Account whether the " earnings " which it has been possible to 
allocate to this " department " have justified the experiment of its 
establishment. 



COLD STORE WORKING ACCOUNT. 
For Year Ending 31st December, 19.. 



To Wages . 
„ Electrical Energy . 
„ Repairs 
„ Depreciation @ 

7i % on Cost 
„ Office Expenses, for 

supervision, etc. . 
„ Profit and Loss A/c, 

profit 



234 

380 

65 


s. 
10 


d. 


90 


10 


- 


50 


~ 


- 


1.072 


- 


- 


1.892 


_ 


_ 




« 


= 



By Cold Storage Char- 
ges A/c, rents on 
goods stored 



1.892 



1.892 



d. 



The principle of record of the allocation of inter-departmental 
transactions is vital, for it is essential that the accounts as presented 
should show clearly the results of each and every section of the 
business of sufficient importance to justify the classification neces- 
sary. A trader, say, may have two departments; so far as the 
outside world is concerned, one may buy heavily, but sell little, 
while the other has few purchases but sells largely. Suppose, for 
example, that the business mainly consists in undertaking contracts 
for the fixing of ornamental tiles in the corridors, etc., of public 
buildings, but that it is eventually decided to undertake the manu- 
facture of the articles required. There would here be two depart- 
ments. Wholesale (Manufacturing) and Retail. The former may 
sell its output to outsiders, or to the Retail Department. The 



DEPARTMENTAL ACCOUNTS 79 

latter might buy, not only from the Wholesale Department, but 
from others. Accounts that did not regard the business as resolved 
into two departments, and that did not take note of the credit due 
from one to the other for value transferred, would be of Hmited use 
as a guide to trading results. The price at which such " transac- 
tions " should be recorded is usually taken to be that payable for 
similar goods if purchased elsewhere, but it is sometimes contended 
that a somewhat lower price should be adopted, on the argument 
that the Wholesale (or Manufacturing) Department has a tied 
customer, of steady turnover and sound credit. It may be that the 
appHcation of the principles outhned involves an anticipation of 
profit on goods transferred, but unsold. This may require the 
making of a provision prior to ascertainment of net profits, but 
does not affect the preparation of the Departmental Accounts. 

Analysis or allocation of transactions need not be confined 
merely to distinct sections of trading, but may be extended to cover 
the main divisions of manufacturing operations. This particularly 
will be the case where manufacturing processes are distinct in 
themselves and result in a saleable product, which may be never- 
theless and is as a fact treated, in whole or in part, as the raw 
material in a further stage of manufacture. In their ordinary form, 
however, the principles of Departmental Accounts are applied to 
transactions of a purely trading character, such as those of a large 
stores. 

The object in view is to prepare an account that will show the 
various gains and losses, and the net balance of gain or loss, resulting 
from the transaction of every department. The items ordinarily 
contained in the Trading Account must therefore be analysed. 

Commencing with Stock on hand, the value to be debited at the 
beginning of the period will be ascertained by stocktaking, and a 
Journal entry made in the following general form — 

1918. Dr. 

Jan. 1. Sundries ..... 
To General Stock, 1917, Ac- 
count, 
for allocation of Stock-on-hand 
over departments as under — 
Clothing .... 
Millinery .... 
Boots ..... 
Hats , . . c r 

Etc., etc. 



80 ACCOUNTING 

The purchases must be analysed in similar manner, so that the 
total debited to General Purchases Account may, at the end of the 
financial period, be distributed over the various departments. 
Similar procedure should be adopted in regard to credits for 
returns, etc. 

The credit side of the Trading Account, consisting of Sales, less 
Returns, and of Stock-on-hand at the end of the period, must be 
similarly allocated. In regard to stock, the periodical stocktaking 
will furnish the necessary particulars. 

In regard to sales, the method of analysis may be by means of 
a Sales Day Book in the ordinary form, with the usual analysis 
columns, or a distinct Day Book for each department may be 
adopted. Either method will furnish the proper classification 
required so far as concerns credit sales, and returns can be similarly 
dealt with. In respect of cash sales, the system of accounting usually 
adopted is one that by means of distinctive checks or slips enables 
each sale to be identified as relating to some particular department, 
and whether payments for goods sold are received at some central 
pay-desk or by departmental receiving cashiers, it should not be 
difficult to construct an analysis of the daily takings. It is 
probable that all sales, both cash and credit, will, in the first 
place, be passed to the credit of a General Sales Account, of 
which, in the manner indicated, a concurrent analysis may 
be made, and be duly summarised for the purposes of the 
Trading Accounts. 

In regard to the Profit and Loss Account, the various debits 
should, where possible, be allocated to the departments to which 
the expense is attributable, or which have derived benefit from it. 
It may sometimes be difficult to determine an equitable basis of 
apportionment and, mainly for this reason, the theory of Depart- 
mental Accounts is frequently not carried beyond the Trading 
Account items. The basis of allocation of various charges is 
indicated below— 

Departmental Wages and Salaries. Chargeable to the depart- 
ments concerned; salaries of sub-managers, etc., to be spread over 
the departments under their charge. 

Rent, Rates, and Taxes. To be debited to the various departments 
by an apportionment of the total on the basis of floor space, with 
allowance for greater or lesser rental value of the positions of each. 



§ 22 



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DEPARTMENTAL ACCOUNTS 83 

Lighting and Heating. Usually upon the same basis as Rent, 
Rates, and Taxes. 

Insurance. Chargeable in proportions of the values of depart- 
mental stocks, wages, etc., according to the nature of the insurance. 

Other Expenses. Usually allocated in total, on the basis of the 
turnover of the departments. It is in regard to these items in 
particular that apportionment is sometimes dispensed with. 

The value of a series of Departmental Accounts prepared in this 
manner lies in the fact that it enables the proprietors or managers 
of a business to see the amount of profit or loss resulting from the 
operations of any one department. Such an account, however, is 
not conclusive, for the nature of the business may require the reten- 
tion of a department, although trading at a loss, to retain the full 
value of the remainder. 



CHAPTER X 

BRANCH ACCOUNTS (I) 

The system of accounting best adapted to the record of the 
transactions of branches varies with the nature of the business 
and the degree of control exercised by the head of&ce. There is 
an obvious difference in form between the two systems of accounting 
appHcable respectively to (1) a series of multiple shops, (2) the 
transactions of the houses of a firm of world-wide connections, 
with branches situate say at New York and Singapore, and a head 
office in London. In the former instance, it probably is the case that 
the branches are merely selling agencies, all buying, distribution 
and management generally being directed from a central office, but, 
in the latter, the factor of distance from head office places the 
branches virtually in the position of independent trading concerns. 
In the latter case, a full and complete set of accounts will be neces- 
sary; in the former, the branches will probably keep only such 
records as are necessary to prove current trading transactions of 
receipt of cash, sales made, etc., leaving to the head office the more 
complete record of the business as a whole and of the branches in 
detail. It is proposed to consider each of the examples referred to, 
but it must be borne in mind that there will be found in practice 
many cases which do not come exactly within the limits of those 
now dealt with. Branches are, in a sense, departments of a business, 
and an analogy with Departmental Accounts, and, to some extent, 
with Agents' Accounts, is supportable in respect of the immediate 
subject matter. 

In its most developed form, the system of operating Branch 
Accounts implies the independence of the branch as an accounting 
unit. Its relation, in an accounting sense, to the head office, is 
indicated by the Head Office Current Account. This will be used 
to record all transactions between branch and head office and the 
balance upon the account will, if a credit, represent its indebtedness 
to head office and be equivalent to the Capital Account. In the 
head office books the transactions with, or for the account of, the 
branch will be recorded in a Branch Current Account, the balance 

84 



BRANCH ACCOUNTS 



85 



of which, if a debit, will represent the capital invested in this special 
section of the business. 

Transactions affecting the Current Account in one set of books, 
whether of head office or branch, must necessarily be recorded in 
the other, for a transfer of value from head office to branch must 
represent to the latter the receipt of value from head office, and 
vice versd. There must thus be reciprocation of entries as between 
the two Current Accounts, and the balances will agree, subject only 
to allowances or adjustments for entries omitted or transactions 
which, by reason of distance and delays of communication, are 
recorded in one set of books as they have arisen, and in the other 
set (with entire accuracy) similarly, but in a later period. 

Thus, assume that head office on 30th December, 1918, remits 
£300 to a branch and debits the appropriate Current Account 
accordingly on that date. The remittance is received on 1st 
January, 1919, and credited by the branch to Head Office Current 
Account on the date of receipt. The reconciliation of the Current 
Accounts will thus show this item in suspense at 31st December, 
1918, and in a Balance Sheet prepared as at that date it will appear 
under " Cash in Transit " or some similar heading. While differ- 
ences may arise in this manner, it is important to observe that 
under strict and accurate accounting there are no exceptions to the 
rule of reciprocating entry. 

The following is the Trial Balance as at 31st December, 1919, of 
the books of the X Branch of the A.B. Trading Company, Ltd. — 



Head Office, Current Account 
Sundry Debtors .... 
Office Furniture, Fittings, etc. 
Lease of Premises 
Stock, 31st Dec, 1918 

Cash 

Bank 

Sundry Creditors, Trade Account 
Rent and Rates outstanding 

Purchases 

Sales . . . 
Returns and Allowances 
General Expenses 




Dr. 

£ 

1,780 
120 
160 

1,250 

12 

242 

8,300 

325 
1,340 


Cr. 
1,615 

1,175 
84 

10,240 
415 




13,529 


13,529 



06 



ACCOUNTING 



From the particulars contained in the books and with the intro- 
duction of the value of stock on hand at 31st December, 1919, the 
Trading and Profit and Loss Accounts for the year ending on that 
date are prepared, as follows — 

TRADING AND PROFIT AND LOSS ACCOUNTS OF X BRANCH 
For Ykar Ending 31st December, 1919 



1918. 
Dec. 31 

1919. 
Dec. 31 


To Stock . . . . 

To Purchases, less Returns . 
„ Balance carried down . 

To General Expenses . 
„ Depreciation of Office 

Furniture . 
„ Amount written off Lease 
„ Balance carried down . 


1,250 

7,885 
1,560 


1919. 
Dec. 31 

1919. 
Dec. 31 

1919. 
Dec. 31 


By Sales, less Returns 
„ Stock .... 

By Balance brought down . 
By Balance brought down . 


9,915 
780 




10,695 


10,695 


1919. 
Dec. 31 


l,i40 

12 
40 
168 


1.560 




1,560 


1,560 






168 



Following the entries of transfer to the Trading and Profit and 
Loss Accounts of the balances of the various nominal accounts, the 
Trial Balance will appear thus — 



Head Ofi&ce, Current Account 

Profit and Loss Account 

Sundry Debtors . 

Of&ce Furniture, Fittings, etc. 

Lease of Premises 

Stock, 31st Dec, 1919 

Cash 

Bank .... 

Sundry Creditors, Trade Account 
Rent and Rates outstanding 



The following entries will then be made as at 31st December, 
1919— 



Dr. 


Cr, 


i 


i 




1,615 




168 


1,780 




108 




120 




780 




12 




242 






1,175 




84 


3,042 


3,042 



In the Branch books — 

Profit and Loss (1919) Account Z)r. 
To Head Office Current Account 
Transfer of balance of former A/c. 
In the Head Office books — 

X Branch Current A/c. . Dr. 

To General Profit and Loss A/c . 
Transfer of profit made by X 
Branch in year ending this date. 



168 



168 



5. d 



i 
168 

168 



5. d. 



BRANCH ACCOUNTS 87 

The Trial Balance as set out shows to the credit of head office 
a balance of £1,615. In the head office books, this must necessarily 
appear to the debit of the branch, subject only to possible items in 
suspense as already explained, and also, possible disputes as 
between head office and branch as to the propriety of certain 
entries. Every transaction properly affecting the Current Account 
in the one set of books must ultimately affect the corresponding 
account in the other. This must apply to the despatch of goods 
from head office to branch, the remittance of cash from 
branch to head office, the discharge of a liability by head 
office for the account of the branch, and any other entry 
affecting either Current Account. For the purposes of accurate 
record, proper systems of advice, invoicing, etc., will be employed, 
and the result will be proved by periodical agreement or recon- 
ciliation. The balance of £1,615 against the branch in head office 
books is increased by the debit of £168 for profit earned. 

All nominal accounts are now eliminated from the branch books; 
the Trial Balance is reduced to a statement of assets and liabiUties, 
together with the balance upon Head Office Current Account; it 
appears, therefore that the latter balance represents the surplus 
of assets over habilities. This fact is of interest in interpreting 
the balance shown upon Branch Current Account in the head office 
books, for this can be resolved into the details of branch assets, 
less liabilities, and so incorporated into the general Balance Sheet 
of the business as a whole. 

The illustration selected has involved the assumption that the 
circumstances require that both branch and head office should 
keep a complete set of books on the principles of double entry. 
This may in other circumstances be unnecessary or inexpedient, 
as, for instance, with what are known as multiple shops. 

In this case, purchases are usually made by the head office, the 
goods being distributed either from some central store or sent 
direct to branches by the suppliers; settlements with creditors are 
usually made by the head office; sales are mainly for cash, or on 
short credit; and the general course of trading is governed by 
instructions from the head office. The branches thus become merely 
selling agencies, and the accounting records kept by them may be 
limited to a simple record of current trading transactions, and of 
stocks. In regard to the latter, the methods of check commonly 



88 ACCOUNTING 

adopted are considered in Chapter IV. Cash Takings are usually 
accounted for at short intervals by collection or remittance to head 
office. A convenient method of remittance can be applied by 
arranging that each branch shall pay in the sum in hand to the 
nearest branch or agent of the bankers to head office. The branch 
will forward its returns, together with the receipted paying-in slip, 
to head office, while the collecting bank, i.e., that operating the 
main or head office bank account, will summarise the credits 
received, entering the daily or periodical total to the credit of head 
office, and presenting a detailed list of lodgments which will agree 
with the branch returns. This procedure, if convenient, will dis- 
pense with much of the expense and trouble of collection, and 
probably represent a gain in interest earned. 

From the nature of the business, it will probably be found desir- 
able to make the accounting records at the branches as simple as 
possible. A Cash Book and Petty Cash Book will be necessary, 
and probably a Sales Day Book and Ledger, but this will depend 
on the number and value of credit transactions, and the records 
in this respect may be limited to a mere memorandum. The Cash 
Book will be closed periodically by lodgment of the balance in hand. 
The Petty Cash Book may be most conveniently operated upon 
the Imprest system, or the payments made from cash takings 
and the total introduced into the Cash Book. 

The head office will, in accordance with the system described, 
receive from each branch a weekly return, of which for purposes 
of illustration the following may be assumed to be the form — 

WEEKLY RETURN OF BRANCH. 

Week Ending 

A. Petty Cash— 



Balance in hand 
Amount received 



Payments: 

Goods . 

Wages . 

Sundries 
Balance in hand 



BRANCH ACCOUNTS 



B. Takings— 
Receipts. 


I 


Payments. 


i 


Ledger credits — per Ust: 
Cash Takings: 

Monday .... 

Tuesday 

Wednesday 

Thursday 

Friday .... 

Saturday . . : 




Amounts banked: 
Tuesday 
Wednesday . 
Thursday 
Friday . 
Saturday 
Monday 




C. Book Debts — 








Balances from previous week 


I 


Cash received . 


i 


Sales .... 




Allowances 








Balances, end of week 









Returns in this form can be completed after banking on the first 
day of the following week. In Statement B no provision is made 
for any balance, on the assumption that all takings are banked 
without deduction. In cases where takings are collected by a 
representative from head office, the form can be modified accord- 
ingly. Whether banked or collected, effective supervision and 
frequent check of transactions of branches by the head ofiice will 
be necessary. 

So far as head office is concerned, the books of account 
immediately concerned with the record of branches* trading will be — 

Purchases Journal, 

Goods transferred to Branches Journal, 

General Cash Book, 

Branches Summary Takings Book, 

Branches Profits Summary Book, 

Branches Ledger. 

Purchases Journal. In regard to the Purchases Journal, pur- 
chases may be for general stock in the first place, for distribution 
as needed, or may be in respect of a particular branch. In the 
former case, the goods will be charged to General Stock, and in the 
latter, direct to the Trading Account of the branch. The Journal 
will therefore be in tabular form. It may, however, be found a 

7— (1377) 



90 



ACCOUNTING 



matter of convenience to regard all purchases as being for general 
stock in the first place, and to deal with allocations to branches 
through the Goods transferred to Branches Journal. The latter may, 
therefore, be the medium for record simply of transfers from general 
stock, or of all goods supplied to branches. 

General Stock Account will thus be charged with purchases, 
some or all as the case may be, and be credited with goods trans- 
ferred against items debited therein. The price at which transfers 
may be made may be cost, in which case the balance of General 
Stock Account should represent the value of Stock-on-hand at 
head office, or central store; but head office may reserve to itself 
a profit, when a credit balance will be shown on this account upon 
stocktaking. 

GOODS TRANSFERRED TO BRANCHES JOURNAL. 



Branch Branch 
A. B. 



r 



Branch 
C. 



Branch 
D. 



Etc. 



Date. 



Particulars. 



Invoice 
No. 



Amount. 



The total of " Amount " column will be credited to General Stock 
Account, and the branches debited with invoices individually in 
the proper columns. 

All transactions relating to branches will be recorded in the 
Branches Ledger. This will contain two separate accounts for each 
branch. Fittings and Fixtures Account, and Current Account, and 
will be controlled as a whole by Branches Ledger Adjustment 
Accounts in the General Ledger on the ordinary principles of 
sectional balancing. The practical operation of the main or 
controlling accounts is explained later. 

In regard to cash transactions, it is necessary that the Cash Book 
be ruled in form convenient for the purposes of the general system 
of accounting. 

Cash Book. 

Branch Takings require a somewhat detailed record. So far as 
the Cash Book entries are concerned, only actual receipts at the 
head office or through the bank can be entered. A Branches 
Takings Book may, however, be necessary, in which a detailed 
record will be kept in adjoining columns of takings accountable. 



BRANCH ACCOUNTS 



91 



and takings accounted for, in respect of each day and each branch. 
The particulars for this record exist in the Weekly Return (some- 
times merely confirming a Daily Return), which will give both takings 
to be accounted for, and those actually paid over, the latter being 
confirmed by the credit from the bank. As the Branches Takings 
Book is merely a temporary record for the purpose of seeing that 
each day's takings are duly and promptly paid in, it may be possible 
to eliminate it from the double-entry system, retaining it as a 
necessary but subsidiary check. 

Dr. 



Date. 



Particulars. 



Fo. 



Branch 
Takings. 



Other 
Receipts. 



Bank. 



Cr. 




























Date. 


Particulars. 


Fo. 


Discount. 


Fo. 


Payments 
for Branches. 


Other 
Payments. 


Bank. 


















! 















So far as the main system of accounts is concerned, the weekly 
collections advised by the bank, or paid in by head office collectors, 
will be debited in the Cash Book under the heading " Branch 
Takings," if convenient, in total, and be posted to the debit of the 
Bank by entry in the " Bank " column on the credit side. The 
details will be recorded week by week in a summary, so arranged 
that the credits to each branch for each week can be set down in 
parallel columns for the whole of the year or half year, and 
cross-added to give the total against each branch. 



SUMMARY TAKINGS BOOK. 



Branch. 

A 

B 
C 
D 



Week, 



Week 



Week 



Week 



Etc., etc. 



Fo. 



Total. 



d2 



ACCOUNTING 



The entries necessary in respect of takings will thus be in effect — 

Bank Dr. 

To Branch Takings A/c .... 

For amounts banked. 

Branch Takings A/c .... Dr. 

To Sundry Branches .... 

For takings as analysed per Summary 

Book. 

The Cash Book contains two further columns with a bearing 
upon the construction of the accounts of the branches. The 
column headed " Other Receipts " may include items affecting 
branches, such as proceeds of sale of fixtures, etc., while the column 
" Payment for Branches " will record — 

Purchase of Fixtures, Fittings, etc., 
Payment of Rent, Rates, etc.. 
Payment of Salaries and other expenses. 

The profit or loss of each branch may be ascertained by 
preparation of a statement in the following form — 

BRANCHES PROFITS SUMMARY BOOK (Year 1919). 



Branch. 


Debts. 
1/1/19 


stock. 
1/1/19 


Fittings, 

etc. 

1/1/19 


Goods 
trans- 
ferred. 


Pur- 
chases. 


Cash 
paid. 


LiabiU- 

ties. 
31/12/19 


Fo. 


Profit. 


Total. 


A 
B 

c 

Etc. 


1 


2 


3 


4 


5 


6 


7 




8 


9 



Fo. 



Loss. 



Liabilities. 
1/1/19 



Branch 
Takings. 



Debts. 
31/12/19 



stock. 
31/12/19 



Fittings, 

etc. 
31/12/19 



Depre- 
ciation 
(memo.) 



10 



12 



13 



15 



16 



Note. — The various columns will be filled up from the records available 
and be balanced by an entry in either column 8 or 10. The cross-addition 
of columns 1-8 should agree with that of columns 10-15. Columns 4, 5, 
6 and 12 can be completed from the entries contained in the various accounts 
in the Branches Ledger. 



BRANCH ACCOUNTS 



93 



From this statement, each branch can be debited with the 
profit, or credited with the loss, attributable to it. 

In regard to Fittings and Fixtures, some explanation is desirable. 
In column 3 are shown the Fittings, etc., as they stand at the begin- 
ning of the year. In column 6 may appear further debits against 
this account. The depreciation is calculated, and the depreciated 
value at the end of the year is shown in column 15. The depre- 
ciation is thus brought into account in ascertaining the correct 
figures for entry in columns 8 or 10, and the amount noted as a 
memo, in column 16. This last record will be used for the purposes 
of entries crediting each Branch Fixtures, etc., Account. The 
debit against the Current Account is given by the amount in 
columns 8 or 10 having been calculated by reference to the reduced 
value as entered in column 15. 

Control Accounts. 

While reference has been made to the fact that the Branches 
Ledger will be controlled by Adjustment Accounts in the General 
Ledger, the explanation so far given has dealt with the transactions 
only as they affect the accounts in the Branches Ledger itself. 
It remains to consider the method and operation of the controlling 
accounts, of which pro forma examples are now given in summary 
form — 

BRANCHES LEDGER (FITTINGS AND FIXTURES) ACCOUNT. 



1918. 
Dec. 31 

1919. 
Dec, 31 


To Balance 
„ Cash (Additions) . 

To Balance 


4,380 
642 


1919. 
Dec. 31 


By Cash (Fittings, etc. 
„ Depreciation. 
„ Balance 


sold 


£ 

146 

622 

4,254 


1919. 
Dec. 31 


5,022 


5,022 


4,254 







BRANCHES 


LEDGER 


(CURRENT) ACCOUNT. 




1918. 
Dec. 31 

1919. 
Dec. 31 


To Balance 

„ Goods (Direct Purchases) 
„ Goods transferred , 
„ Profit and Loss Account, 
profit 

To Balance 


i 
13,351 

82,614 
422,817 

45,613 


1919. 
Dec. 31 


By Cash Takings 
„ Balance 


i 

545,015 
19,380 


1919. 
Dec. 31 


564,395 


564,395 ^ 


19.380 





Note. — The balance, ;^19,380, represents the surplus of branch stock, 
debts and cash, over liabilities, particulars of which are shown in the Branches 
Profits Summary Book. 



04 ACCOUNTING 

The method of operation of the accounting system can now be 
viewed as a whole, the accounts set forth being typical of the 
subsidiary accounts in the Branches Ledger. 

As regards Fittings and Fixtures Accounts, the case is simple. 
Cash entries are posted in detail in the Branches Ledger, and 
duplicated in the control account. 

In regard to Current Accounts, the treatment of Goods, posted 
from the Purchases Journal, or Goods transferred to Branches 
Journal, requires little explanation beyond that already given. 
Cash Takings are dealt with first by entry in the Cash Book, the 
total being posted weekly or monthly to Cash Takings Account. 
The details are analysed in the Summary Takings Book, by means 
of which it becomes possible, at yearly or half-yearly periods, to 
debit Cash Takings Account with the total receivable in respect of 
the period closed, and to credit each individual branch in the 
Branches Ledger, with a duplicate or controlling credit upon the 
Adjustment Account in the General Ledger. The takings receiv- 
able for the last week of the year may not be received until the 
following year. These will, however, be debited against Cash 
Takings Account by entry in the Summary Takings Book in the 
usual way, with the result that Cash Takings Account will, at the 
end of the period, show a debit balance of the amount of these 
takings in " suspense." 



CHAPTER XI 
BRANCH ACCOUNTS (H) 

Foreign Branches. 

The matter hitherto dealt with has related solely to the accounts 
of branches trading within the United Kingdom, or, at any rate, 
in currency similar to that used for record of head office transactions. 
It remains to consider the problems of accounting arising in connec- 
tion with foreign branches trading in foreign currency and the 
method of dealing at head office with the record in equivalent 
sterling of transactions not having a sterling value. 

The general principles submitted still apply. The Branch 
Current Account is debited in respect of all transactions involving 
the transfer of value to or for the account of the branch, and credited 
with value received, whilst profit earned is debited to the branch 
in the usual way; and the principle of reciprocal entries in the 
Current Accounts kept in the books of head office and branch is 
strictly observed. There is, however, this difference; that, while 
the head office books are necessarily recorded in sterling, those of 
the branch are with equal reason kept in the local currency. The 
reciprocation of entries and the reconciUation of the Current 
Accounts thus become less simple than where the amounts appear 
similar in both sets of books. 

This difficulty is adjusted in practice by arranging that the head 
office books shall, in respect of transactions affecting the Branch 
Current Account, preserve a memorandum record of the currency 
equivalents of sterling entries, the latter alone, however, forming 
part of the double-entry system at head office. 

For the purposes of head office accounting, therefore, a sterling 
basis is adopted, but transactions upon the Branch Current Account 
will be duplicated in currency at the amount accepted for entry 
in the books of the branch. By means of the additional currency 
columns, the complete reciprocation of entries in the two sets of 
books can be observed and controlled, and, ultimately, the debit 
to the branch of the profit earned (in currency) will bring the result 
already demonstrated, that the balance against the branch will 

95 



96 ACCOUNTING 

represent the surplus of branch assets over Uabilities (in currency). 
This procedure requires, at head office, a convenient record of 
sterling and currency equivalents, the latter in memorandum and 
for the purposes stated, the former for the purposes of the regular 
system of accounting. The ultimate balance in currency, which will 
agree or be capable of being reconciled with the balance in the 
books of the branch to the credit of Head Office Current Account, 
will thus be represented by what may be deemed temporarily its 
sterling equivalent. While each transaction will be converted 
from sterling to currency, or vice versa, upon what may appear to be 
the most correct principle for ascertaining its corresponding value, 
certain differences are bound to occur, which will cause the final 
balance, as it appears in sterling, not to represent the exact value 
of the assets, less liabilities, of the branch. It is necessary to 
consider in more detail the method of keeping the accounts affected, 
the principles upon which the conversion to alternative value may 
be made, and the manner in which the balance of the sterhng entries 
as valued may be adjusted to bring it to the true amount of the 
surplus of assets over liabilities at the branch. 

Assume that a company, the head office of which is situate in 
London, has a branch in South America, to which it consigns goods 
for purposes of sale. By means of such consignments and of local 
purchases, the branch carries on a general trading business, making 
remittances on account of profits earned, and in payment for goods 
supplied, to the head office. 

The Current Account contained in the head office books may 
conveniently be divided into the following — 

General Current Account, 

Goods Account, 

Remittances Account, 
the last two being incorporated with the first named by transfer 
at the end of the financial period. 

Branch General Current Account. 

The Branch General Current Account will contain at its debit the 
balance brought forward from the previous period, representing 
the surplus of assets over liabilities at that date, and such further 
entries as are unsuitable for record in Goods or Remittances 
Accounts. 



BRANCH ACCOUNTS 97 

All the accounts named will be kept both in currency and in 
sterling, but the latter alone will enter into the system of double 
entry. 

The branch will keep similar accounts for its head office 
transactions, but as a rule in currency only. 

Branch Goods Account. 

Branch Goods Account will contain the record of all transactions 
of goods consigned to the branch, to each of which both a sterling 
and a currency value will be given. The currency value is usually 
fixed by head office and accepted by the branch as advised. The 
method of arriving at the fair equivalent varies with the circum- 
stances. Should the rate of exchange be subject to frequent and 
considerable fluctuation, it may be desirable to invoice each con- 
signment at a price obtained by conversion of its sterling value 
at the rate ruHng on the date of despatch, while, where fluctuations 
are within narrow limits, a fixed rate may be adopted. The latter 
method possesses obvious conveniences. The object in view is in 
every case the calculation of a converted equivalent as near as 
possible to the true value. 

Such consignments are dealt with by the branch by a credit 
upon Head Office Goods Account of the amount of each invoice as 
expressed in currency. 

Branch Remittances. 

Branch Remittance Account will record remittances by the 
branch to the head office, with possibly occasional transactions of 
the reverse character. The remittance may be by draft, in currency 
or sterling, or even in specie, but the exact form is immaterial. Each 
remittance will represent a specific amount of currency, and produce 
an exact amount of sterhng upon realisation. There is, therefore, 
no complication in arriving at the equivalent value. In the books 
of the branch. Head Office Remittance Account will be debited 
with the currency value of any remittance to head office. In the 
books of the latter, Branch Remittance Account will be credited 
in sterling with the amount realised, and the currency equivalent 
entered in the proper column against the entry. 

It is further assumed that the Trial Balance extracted from the 



m 



ACCOUNTING 



books of the branch as at 31st December, 1919, appears as shown 
by the following currency figures — 

TRIAL BALANCE.— 3 1st December, 1919. 





Dr. 


Cr. 




$ 


$ 


Head Office General Current Account . 




35,000 


Head Office, Goods Account 




42,350 


Remittance Account 


37,190 




Cash 


6,420 




Drs 


29,340 




Crs 




10,120 


Bills Receivable 


4.640 




Land and Buildings . , . . . 


5,230 




Stock. 31st Dec, 1913 


16.700 




Purchases and goods from Head Office . 


46,400 




Sales 




63,810 


General Expenses 


6,790 




Discounts ....... 




1,430 




152,710 


152,710 



NoTE.—The value of the Stock at 31st Dec, 1919, is $18,250. 

In the Trial Balance set out, the first three items are represented 
and, it may be presumed, reconciled, by similar balances in the 
books at the head office. There may, of course, be transactions 
in " suspense " which render impossible an absolute agreement at 
a given date. This, however, does not alter the general principle. 
These balances will be transferred accordingly in the branch books 
to Head Of&ce General Current Account, and corresponding trans- 
fers will be made in the head office books. In the latter, the 
balances of Branch Remittance and Branch Goods Accounts will 
appear in both sterling and currency, and the Branch General 
Current Account will therefore appear as follows — 

BRANCH GENERAL CURRENT ACCOUNT. 



1918. 
Dec. 31 

1919. 
Dec. 31 


To Bal'ce brought 
forward 

To Branch Goods 

A/c . 

To Bal'ce brought 
down . 


s 

35,000 
42,350 


£ 

7,350 
8,620 


s. 

7 

6 


d. 
10 

8 


1919. 
Dec. 31 


By Branch Remit- 
tance A/c . 
„ Balance carried 
down , 


$ 

37,190 
40,160 


£ 
7,942 
8.028 


■ 


d. 
4 
2 


1919. 
Dec. 31 


77,350 


15,970 


14 


6 
2 


77,350 


15,970 


14 


6 


40,160 


8,028 


11 











The currency values of the various items entering into this 
account are, it will be observed, in agreement with those appearing 



BRANCH ACCOUNTS 



d9 



in the books of the branch. The amounts in sterHng have, as to 
Branch Goods Account and Branch Remittance Account, been 
arrived at in accordance with the principles stated, and as regards 
the commencing balance, represents the value appearing at that 
date as attributable to the individual assets and liabilities entering 
into the currency figure of $35,000. 

It is necessary that the balance of profit earned be dealt with 
in the respective Current Accounts. In the branch books, the 
amount will be passed in currency from the debit of Profit and 
Loss Account to the credit of Head Office Current Account; in the 
head office books. Branch Current Account will be debited, and 
General Profit and Loss Account credited, this latter entry being 
made in sterling. The amount of this entry has now to be 
ascertained, and the principle of its conversion considered. 

BRANCH TRADING AND PROFIT AND LOSS ACCOUNT 
For Year Ending 31st December, 1919. 



1918. 
Dec. 31 

1919. 
Dec. 31 


To stock on hand 

To Purchases . 
„ Balance carried down . 

To General Expenses. 
„ Balance transferred to 
Head Office, Current 
Account . 


$ 

16,700 

46,400 
18,960 


1919. 
Dec. 31 

1919. 
Dec. 31 


By Sales . . . . 
„ stock on hand 

By Balance brought down . 
„ Discounts 


S 

63,810 
18,250 




82,060 


82,060 


1919. 
Dec. 31 


$ 

6,790 

13,600 


$ 

18,960 
1,430 




20,390 


20,390 



The balance of profit earned by the branch is as shown. For 
purposes of conversion, it is usually assumed that profit may be 
deemed to have been earned evenly throughout the period, and 
therefore to be fairly expressed in sterling by conversion at the 
average rate of exchange for the period. 
JOURNAL ENTRY. 

Branch General Current A/c . . Dr. 

To General Profit and Loss A/c . . . 2,792 12 1 

For profit earned during year ending 31st 
Dec, 1919, viz., $13,600, converted at 
average rate of exchange, 4-87. 

As regards the books of the branch, the transfer to Head Office 
Current Account of the balances of Profit and Loss Account, Head 
Office Goods Account, and Head Office Remittance Account, 
reduces the Trial Balance to a statement of assets and liabilities, 





/: 


s. 


d. 


^ 


s. 




2,792 


12 


1 


2.792 


12 



100 



ACCOUNTING 



the surplus of the former over the latter being shown to credit of 
head office. In the books of the latter, a similar balance must appear 
in currency to the debit of the branch. This balance accordingly 
represents assets, less liabilities, of the branch; it has been given a 
sterling value, being the balance of the sterling equivalents of 
the various entries, debit and credit, resulting in the final 
balance; it now remains to ascertain, by reference to the actual 
assets and habilities, what their true value is, and to adjust the 
sterling balance of the Current Account accordingly. The con- 
tinuous record of sterling equivalents in the head office books has 
been for the purposes of book-keeping, but, while the ascertainment 
of these equivalents has been made on principles likely to cause 
them to prove as nearly accurate as possible, the final result is 
tested by valuation upon the facts as they stand at the date of the 
Balance Sheet. 

For this purpose, it is convenient to prepare the Trial Balance 
in double column form, converting the various items in accordance 
with the following rules — 

General Current A ccount. Value as per previous Balance Sheet; 
Head Office Goods Account. In accordance with rates fixed, 
which may be permanent or be varied from time to time; 

Head Office Remittance Account. On basis of actual sterling 
realised; 

Profit and Loss A ccount. At average rate for the period ( $4.87) ; 
Fixed Assets. At rate ruling on date of acquisition ($4.90); 
Floating Assets and Liabilities. At rate ruling at the date 
of the Balance Sheet. 

The Trial Balance will appear as follows — 

TRIAL BALANCE.— 31ST Dec. 1919. 





1 


£ 


s. 


d. 


$ 


£ 


s. 


d. 


Head Office, Gen. Current A/c 










35.000 


7.350 


7 


10 


Do. Goods A/c . 










42,350 


8.620 


6 


8 


Do. Remittance A/c . 


37,190 


7,942 


3 


4 










Profit and Loss A/c 










13,600 


2.792 


12 


1 


Cash . 


. 


6,420 


1,284 


- 


- 










Debtors 


. 


29,340 


5,868 


- 


- 










Creditors 












10.120 


2.024 


— 


_ 


Bills Receivable . 


; 


4.640 


928 


- 


- 










Land and Buildings 


• 


5,230 


1.067 


6 


11 










Stock, 31st Dec, 1919 


* 


18,250 


3,650 


- 


- 












101.070 


20.739 


10 


3 


101.070 


20.787 


6 


7 



BRANCH ACCO,U>^g 



101 



From a comparison of the sterling columns, it appears that the 
surplus of branch assets over liabihties has been overvalued by 
£47 16s. 4d. The following entry is therefore necessary — 



General Profit and Loss A/c . Dr, 

To Branch General Current A/c . 

For difference in exchange for 

period for year ending 31st Dec, 

191J. 




I 
47 



1918. 
Dec. 31 



1919. 
Dec. 31 



1919. 
Dec. 31 



To Bal'ce brought 
forward 

To Branch Goods 
Account 
General Profit 
and Loss A/c 
profit earned 



To Bal'ce brought 
down 



$ 

35,000 


7,350 


s. 
7 


d. 
10 


1919. 
Dec. 31 


42,350 


8,620 


6 


8 




13,600 


2,792 


12 
6 


1 
7 




90,950 


18,763 


53,760 


10,773 


6 


11 



By Branch Re 
mittance A/c 

General Profit 
and Loss A/c 
difierence in 
exchange 

Balance car- 
ried down 



$ 


i 


s. 


37,190 


7,942 


3 




47 


16 


53,760 


10,773 


6 


90,950 


18,763 


6 









The balances shown now accurately represent the surplus of 
branch assets over branch liabilities; that in currency agrees with 
the amount standing to credit of the head office in the branch books, 
while that in sterling is exactly the true value of the surplus. 



•^ir;* 



CHAPTER XII 

PARTNERSHIP ACCOUNTS 

The ordinary features of Partnership Accounts do not as a rule 
involve problems of exceptional difficulty, and it is proposed to 
deal only with some of the more comphcated points that may arise 
in settling accounts of this description. 

The relationship existing between the individual members of a 
firm is defined by the partnership agreement, which may be either 
written or verbal, and in the solutions given of stated problems 
the effect of the agreement is deemed to have been correctly inter- 
preted in each case. The first set of illustrations deals with various 
alternative methods of division of profits, each being in accordance 
with the partnership agreement applicable thereto. 



Case I. Ordinary Simple Case — 

PROFIT AND LOSS ACCOUNT. 
Dr. 



Cr. 



To Interest on Capital- 

B 

To Salaries — 
A 
B 



To A, one-half share of balance 
To B, do. do, 





£ 


s. 


d. 


• £150 
. 430 


580 






. £500 
. *360 

mce . 
do. . 


860 
1,590 
1,590 


- 


- 




4,620 


z. 


■= 



By Balance 



£ 

4.620 



4,620 



Case II. — ^Allowance for one Partner's (C's) Share in 
Profits and Part of his Agreed Salary (£100) out of Another 
Partner's Share — 



Note. — The illustration is applied to the following facts: A and B agree 
to admit C as a partner, upon the terms that he is to be entitled to a 
one-sixth share in profits, after charging interest on capital and salaries of 
all partners, and also to a salary of £^Q0. As between A and B, it is agreed 
that A's share in profits is to be affected in respect of C's interest in profits 
only by the salary (;^300) formerly received by C prior to his admission as a 
partner. The excess salary (;^100) and share of profits due to C consequently 
come out of 3's sh3.re, 

102 



PARTNERSHIP ACCOUNTS 



103 



Dr. 



PROFIT AND LOSS ACCOUNT. 



Cr. 



To Interest on Capital — 

A . . £120 

B . . .400 



Salaries — 
A 
B 
C 



£300 
, 400 
, 400 



„ A, one-third share of profits 
(£2,180, plus C's salary £100) = 
£2,280 . . . 

„ B, two-thirds share of 

profits, £2,280 1.520 - 
Less — 
C's salary £100 - - 
C's share 363 6 8 

463 6 8 



C, one-sixth of share of profits, 
£2,180 . . . , 



i 


s. 


d. 


520 
1,100 










760 


- 


- 


1,056 
363 


13 
6 


4 
8 


3,800 




- 



By Balance 



£ 
3,800 



3,800 



Case III. Similar to Case II, but where the Profits are 
Insufficient to Cover Interest on Capital and Salaries 
OF Partners — 



Dr. 



profit and loss account. 



Cr. 



To Interest on Capital — 

A . . £120 

B . . .400 



ilaries— 
A 


£300 




B 


. 400 


_ _ 


C 


. 400 


- - 



520 



1,100 



1,620 



By Balance 

„ A, one-third share of debit 

balance, (£720, less C's salary, 

£100) =£620 
„ B, two-thirds share of 

debit balance, £620 £413 6 8 

Add C's salary . 100 - - 



513 
Less C, one-sixth 
share of debit 
balance £720 . 120 



C, one-sixth share of £720 



£ 
900 



206 



120 



1,620 



The following example illustrates the adjustment of the accounts 
as between the partners over a period of years in a case where the 
system of book-keeping is deficient, and Balance Sheets have not 
been regularly prepared. 

Problem. A and B, trading in partnership, were, at 31st Dec, 
1909, in credit upon their Capital Accounts to the amounts of £6,000 
and £3,000 respectively. B is indebted to A in the sum of £1,200, 
being the balance of a total amount of £1,800 agreed to be paid by 
him for purchase of an interest in the goodwill of A, such sum to 



104 



ACCOUNTING 



be contributed to A out of the surplus on B's Current Account, as 
appearing at the end of each year, but to be retained in the business 
as additional capital of A. The partners' drawings have been: 
A, £500; B, £400 per annum. Profits are divisible, subject to 
interest on capital at the rate of 5 per cent, per annum, equally. 
It is desired to ascertain the position of the partners as at 31st 
December, 1918. 

The first step necessary is the ascertainment of the amounts of 
the surplus of assets over liabilities, other than capital, as at 
31st December in each year. It is assumed that these are as 
follows — 

£ 

9,150 

9.460 

. 10,020 



As at 31st December, 1915 

„ 1916 

., 1917 

.. 1918 



10,580 



From the particulars given, the following accounts are prepared — 



STATEMENT OF PROFITS. 





1915. 


1916. 


1917. 


1918. 




1915. 


1916. 


1917. 


1918. 


Surplus at beginning 

of year . 
Balances carried down, 

profit . 


i 
9,000 
1,050 


i 
9,150 
1,210 


£ 

9,460 
1,460 


i 

10,020 

1,460 


Surplus at end of 

year . 
Drawings 

Balances brought 
down . 


9,150 
900 


£ 

9,460 
900 


£ 

10,020 
900 


£ 

10,580 
900 




10.050 


10,360 


10,920 


11,480 


10,050 


10,360 


10,920 


11,480 


To Interest on 
Capital— 

A . . . 
B . . . 
To Current A/cs, for 
half shares of 
profits — 

B ! ! ! 


300 
150 

300 
300 


302 
150 

379 
379 


309 
150 

501 
500 


321 
150 

494 
495 


1,050 


1,210 


1,460 


1,460 




1,050 


1,210 


1,460 


1.460 


1,050 


1,210 


1,460 


1,460 



A. CAPITAL ACCOUNT. 





1915. 


1916. 


1917. 


1918. 




1915. 


1916. 


1917. 


1918. 


To Balances at end of 
year 


£ 
6,050 


£ 

6,179 


£ 
6,429 


£ 
6,674 


By Balances . 

„ B, Current A/c . 

By Balances . 


£ 
6,000 
50 


6,050 
129 


6,179 
250 


6,429 
245 




6,050 


6,179 


6,429 


6,674 


6,050 


6,179 


6,429 


6,674 












6,050 


6,179 


6,429 


6,674 



PARTNERSHIP ACCOUNTS 



105 



A. CURRENT ACCOUNT. 





1915. 


1916. 


1917. 


1918. 




1915. 


1916. 


1917. 


1918. 


To Drawings . 
„ Balances 


500 
100 


500 
281 


50^0 
591 


io 

906 


By Balances — 

Int. on Capital . 
Share of Profits . 

„ Balances 
. ACCOUNT. 


i 

300 
300 


i 

100 
302 
379 


281 
309 
501 


i 
591 
321 
494 




600 


781 


1,091 


1,406 


600 


781 
281 


1,091 
591 


1,408 






B. CAPITA! 


100 


906 








By Balance (1914- 
1918) 

B. CURRENT ACCOUNT. 




3,000 




1915. 


1916. 


1917. 


1918. 




1915. 


1916. 


1917. 


1918. 


To Drawings 
„ A, Capital A/c . 


/oo 

50 


4 

129 


/oo 

250 


245 


By Int. on Capital . 

„ Share of Profits . 


,fo 

300 


379 


,lo 

500 


495 




450 


529 


650 


645 


450 


529 


650 


645 



The adjustment of accounts upon a dissolution of partnership 
(as to one or more of the members of a firm) involves the preparation 
of a Balance Sheet showing the amount due to each outgoing 
partner. 

Apart from any specific agreement which may be contained in 
the articles of partnership, an outgoing partner (or his representa- 
tives) has the right to have such an account taken for the purpose 
of ascertaining his interest. Where the dissolution concerns one 
only of the partners, effect can conveniently be given to the adjust- 
ments necessary, by the preparation of a Dissolution or Revaluation 
Account. 

The construction of an account of this kind is usually necessary, 
for it is generally the case that, in respect of some assets, the figures 
appearing in the partnership books do not absolutely represent 
their value, while on the other hand some liabilities may not be 
accurately stated. 

The asset of Goodwill, for example, is usually unrecorded in the 
books of a firm; capital expenditure, in respect of which an asset 
exists, may have been charged to revenue; the Reserve for Bad Debts 
may appear at an excessive or insufficient figure; while the books 

8— (1377) 



106 



ACCOUNTING 



may omit to record a possible liability in the form of an obligation 
by way of an annuity to the representatives of a former partner. 

These are merely illustrations, but it may be the case that, from 
these and similar causes, the Capital and Current Accounts do not 
show correctly the exact value of each partner's interest. 



REVALUATION ACCOUNT. 



1919. 
Dec 31 



To Mrs. X, capital value of 
unexpired annuity 
payable to her , 
„ Shares A/c, loss in value 
„ Current A/cs, for shares 
in profit upon revalua- 
tion — 

A, one-half 985 - - 

B, one-third 656 13 4 

C, one-sixth 328 6 8 



1,200 
640 

1,970 


- 


- 


1919. 
Dec. 31 


1 3,810 


= 


=- 



By Goodwill A/c, value as 

agreed 
Plant and Machinery A/c 
Reserve for Bad Debts, 

excess provision . 
Capital Expenditure 

charged to Revenue, 

less depreciation 



2,400 
420 

130 
860 


- 


3,810 


_2\ 



The adjustments made upon the accounts of the partners by 
means of this account are required in order that the interest of any 
one of them in the firm may be correctly shown at the credit of his 
Capital and Current Accounts, for it will be observed that the 
alterations are made with the view of recording in the books the 
true existing values of all assets and liabiHties. 

It is possible for the continuing partners again to treat as 
unrecorded those items not previously contained in the books, and 
this could be effected by a reversal, after the retirement of the 
outgoing partner, of some or all of the entries in the Revaluation 
Account. Assume, for example, that in regard to the account set 
out, C is the outgoing partner. The effect of the transfer to the 
credit of C's Current Account of his proportionate share of the gain 
appearing upon revaluation, is to show upon that and his Capital 
Account jointly the value of his interest in the partnership. The 
construction of the Revaluation Account has also had the result 
of altering the book values of certain assets and of creating one 
additional liability. Of the accounts so adjusted, the continuing 
partners, A and B, who arrange to share in the same relative 
proportions, desire that the Goodwill Account and the account 
of the liabiUty to Mrs. X (being the capital value of an annuity 
hitherto charged as and when paid to Profit and Loss Account) 



PARTNERSHIP ACCOUNTS 



107 



be eliminated from the books. The following entries will then be 
made upon Revaluation Account. 



REVALUATION ACCOUNT. 



1920, 




f. 


s. 


d. 


1920. 




/• 


s. 


d. 


Jan. 1 


To Goodwill A/c 


2,400 






Jan. 1 


By Mrs. X, Annuity A/c . 

„ Current A/cs, for shares 
in respect of balance of 
entries reversed as 
above — 

A, three-fifths . £720 

B. two-fifths . 480 


1,200 
1,200 








2,400 


=s 


2,400 


^ 


z 



The entries given serve to illustrate a method of treatment 
of Goodwill upon the admission of a partner, but there are various 
other methods. Assume that D is admitted as a partner, upon terms 
inter alia that he contributes a stated sum as capital and purchases 
a one-quarter share in the Goodwill and profits for the sum of £800; 
further, that there are three partners sharing, A, one-third, B, 
five-twelfths, D, one quarter. 

(1) Raise a Goodwill Account for the full value of the asset, 
£3,200, crediting this amount to A and B in their shares as existing 
prior to the admission of D; credit the sum paid by D, viz., £800, 
to his account; and reverse the debit upon Goodwill Account by 
transfer to the accounts of A, B, and D, in the new proportions; or, 

(2) Credit the £800 received from D to the accounts of A and B 
in the relative shares as existing prior to D's admission as a partner; 
or 

(3) Debit D with the amount of £800 payable by him, crediting 
A and B as in (2); and credit the £800 when received to D's account. 

Of these, the method first described is to be preferred, as expressing 
most accurately the effect of the transaction. 

The illustrations given explain the manner in which the adjust- 
ments required upon a change in the constitution of the firm may 
be made. Such changes may frequently occur, and it is possible 
that the accurate adjustment which is desirable is not in fact made 
as regards some specific asset. 

A firm of solicitors, for example, may purchase a reversionary 
interest for a lump sum, and this, notwithstanding changes in the 
identity of the members of the firm, may be maintained as an asset 



108 



ACCOUNTING 



in the books of the partnership at its cost price until it falls in. The 
profit (if any) arising has accrued over the whole period, and is 
attributable in the proper proportions to the various distinct 
partnerships that have existed during that time. 

Suppose that a transaction of this nature was entered into on 
1st Jan., 1913, by a firm consisting of three partners. A, B, and C, 
sharing equally, who acquired the asset for £1,200. 

On 31st December, 1915, A retires and D is admitted, and the 
new shares are agreed as — 

B two-fifths 

C . . . . . two-fifths 
D one-fifth 

On 30th June, 1918, C dies; B and D continue in partnership, 
sharing B, three-quarters, D one-quarter. 

The reversion falls in on 30th June, 1919, realising £1,800. 

It is desired that the realised profit of £600 should be apportioned 
between A, B, C, and D upon an equitable basis. 

For this purpose, each group of partners must be regarded as 
a distinct partnership, acquiring the asset from the preceding set 
at its fair value, and transferring it to the succeeding group on a 
similar basis of price. For the purposes of such transfer, the former 
set of partners are entitled to be credited with the due proportions 
(as then existing between them) of the value of the asset, while the 
new group purchase it in the new shares. 

Assuming that the worth of an asset of the character stated is 

fairly calculated upon the basis that a purchaser would make an 

allowance for 6 per cent, compound interest per annum, its value 

at the material dates would be — 

£ 
. 1.200 
. 1,429 
. 1,653 
. 1.800 



At 1st January, 1913 
At 31st December, 1915 
At 30th June, 1918 . 
At 30th June, 1919 . 



The apportionment of the profit of £600 is now shown — 







1st Partnership. 




2nd Partnership. 




3rd Partnership. 




Shares 


Dr. 


Cr. 


Shares 


Dr. 


Cr. 


Shares 


Dr. 


Cr. 






i 


i 




i 


i 




i 


i 


A 


1/3 


400 


477 














B 


1/3 


400 


476 


2/5 


571 


661 


3/4 


1,240 


1,350 


c 


1/3 


400 


476 


2/5 


572 


661 








D 








1/5 


286 


331 


1/4 


413 


450 




1,200 


1,429 


1,429 


1,653 


1,653 


1,800 



PARTNERSHIP ACCOUNTS 

The net result of the above statement is as follows — 

. I7 

. 276 
. 165 
. 82 



109 



A should receive 

B „ „ . 

C's representatives should receive 

D should receive 



600 



It may, of course, be the case that a Jinal settlement has been 
made with the outgoing partner or his representatives, in such 
terms as to preclude him or them from any subsequent claim. 

Upon the preparation of accounts as between partners, whether 
in the usual course or upon a dissolution, it may appear that one 
or more partners is in debit. The amount due should, of course, 
be paid by him to the firm, but there may be cases where this is not 
possible. The remaining partners then suffer loss, inasmuch as the 
amounts by which they are in credit cannot be satisfied in full from 
the firm's assets. 

A loss of this nature is to be distinguished from an ordinary loss 
on trading, or realisation, for it is one which, being caused by the 
failure of one partner to contribute what is properly due from him, 
must necessarily be borne by the remaining members of the firm. 

It has been decided {Garner v. Murray, 1904, 1 Ch. 57; 32 Account- 
ant Law Reports, 3) that a loss of this character is to be regarded 
as a loss of capital, and is to be borne by the other partners in the 
proportions of their interests in capital, irrespective of their shares 
in profits and losses resulting from trading. 

The position in Garner v. Murray upon dissolution was 
approximately as follows — 



Capital Accounts. 



Gamer 
Murray 



2,500 
314 



2,814 



Assets. 

Cash 

Wilkins, overdrawn 
Deficiency of Firm 


1,916 
263 
635 


s. 


d. 




2,814 


_ 


- 



The " deficiency of firm,'* representing a loss arising from trading 
or upon realisation, was obviously one which all partners were 
under liability to make good by contribution. Such contribution, 
however, could be made by Garner and Murray only, for it appeared 
that Wilkins was unable to pay anything on account of the balance 



110 



ACCOUNTING 



standing to his debit. Garner and Murray jointly were thus suffer- 
ing a loss to them of Wilkins' share of the " deficiency of firm," 
plus the amount of the balance already appearing against him. 

The position is made clearer by the submission of a Balance Sheet 
in the following revised form, it being assumed that the partners 
share equally in profits and losses. 



Capital Accounts. 



Gamer 
Murray 



%1J 


s. 

_ 


d. 


2,814 


z 



Assets. 

Cash 

Gamer, proportionate share of defi- 
ciency of Firm 
Murray, do. do. do. 



Wilkins, balance . . . £263 
„ share of deficiency . 211 



1,916 

212 
212 


s. 


d. 


2,340 

474 




2,814 


_ 


z 



The question arising for determination was as to the method of 
apportionment as between Garner and Murray of the loss falling 
upon them through the failure of Wilkins to pay what appeared 
due from him. The generally accepted method, prior to the 
case quoted, was to treat the loss as one to be borne by the remaining 
partners in the proportions in which they were interested in ordinary 
profits and losses, which, in the circumstances quoted, would be 
in equal shares. This would imply that a loss of this nature is 
similar to ordinary losses, and would place the solvent partners under 
obligation to contribute their respective shares thereof. It was 
decided, however, that no liability to contribution existed; that a 
loss falling on some of the partners from the specific cause that 
another had failed to pay what was due from him was to be dis- 
tinguished from a loss of the firm as a whole; and that it was to be 
regarded as a loss of capital, to be borne by Garner and Murray 
in the relative proportions of their shares in capital. 

The loss of £474 was, therefore, apportionable — 

As to Garner ||^£; as to Murray ^^ 

and the assets were applicable — 

As to Garner, f|^ of £2,SA0, less ;^212 due from him; 
„ „ Murray, ^V¥k oi ;^2.340, „ ^^212 „ 

It will be observed that the loss of £474 has been apportioned 
on the basis of the amounts appearing to the credit of the Capital 



PARTNERSHIP ACCOUNTS 



111 



Accounts of Garner and Murray respectively. In practice, the 
balances of these accounts may be adjusted at each balancing date 
by transfer to the credit and debit respectively of the amounts of 
profits and drawings attributable to the respective partners. Such 
alteration imphes a revision of the partnership agreement and a 
fresh contract as to the respective shares of the partners in capital, 
for, under the construction placed upon the provisions of the 
Partnership Act, 1890, capital is to be regarded as of an agreed 
amount, to be made good by contribution from the partners in 
their respective shares when reduced by trading losses. Where 
periodical adjustment is made of the balances of the Capital 
Accounts, the agreed shares in capital are to be considered as those 
fixed and accepted by the partners, and may be evidenced by a 
signed Balance Sheet, or by the state of the accounts in the books, 
or in some manner showing definite consent to the adjustment. 
In the illustration given, therefore, the apportionment has been 
made on the basis of the Capital Accounts as appearing prior, and 
not subsequent, to the transfer (if any) of the shares of loss to 
the accounts of the partners. 

Upon the dissolution of a partnership, the assets may be 
realised at various dates over a considerable period. The claims 
of creditors and of the partners in respect of loans being satisfied, 
any surplus reahsed belongs to the partners. 

Where the shares in capital are not in the same proportion as 
in profits and losses, some care is necessary in making a distribution 
of sums in hand. This may best be illustrated by example. 

Example. The Balance Sheet of the firm of A, B, and C as on 
31st December, 1917, on which date dissolution was agreed upon, 
was as follows — 



Liabilities. 

Sundry Creditors 
Capital Accounts — 

A . . . 

B . . . 

C . . . 



£4,950 
8,100 
2,500 



£' 


s. 


d. 


3,000 


_ 


- 


15,550 





as 


18,550 



Assets. 
Sundry Accounts 



18,550 


s. 

_ 


d. 


18,550 


j; 


_ 



m 



The assets were reahsed gradually, and were appHed primarily 
satisfaction of the claims of creditors. The following sums 



112 



ACCOUNTING 



were available for distribution amongst the partners at the dates 
named — 

1918. i 

May 31 4,600 

^. Aug. 15 3,000 - 

Oct. 31 2,100 

At the latest date given it appears that there are further assets 
unreaHsed, and the final result of the liquidation in profit or loss 
cannot, therefore, be ascertained. It is desired to distribute the 
amounts in hand upon some equitable basis. 

The shares in profits and losses are as to — 

A one-half 

B . . . . . one-third 
C . . . . . one-sixth 

Having regard to the shares stated, it appears that B has con- 
tributed a larger proportionate amount of capital than either B 
or C, while C, with one-sixth share, has a greater proportionate 
interest in capital than A. In making distributions, therefore, it 
is desirable that the inequahty of the shares in capital and, con- 
sequently, in the loss of interest thereon be adjusted by making 
repayment in the first place to those partners who have most largely 
contributed, until such time as the balances remaining to the 
credit of the partners are in the same respective proportions as the 
shares in profits. When this position has been arrived at, 
subsequent distributions may be made in the latter proportions. 





A. 


B. 


C. 


Capital as per Balance 

Sheet 
First Distribution 


4,950 


s. 


d. 


i 

8,100 
4,100 


s. 


d. 


i 

2.500 
500 


s. 


d. 


Second 


4,950 
475 


- 


- 


4,000 
1,016 


13 


4 


2,000 
508 


6 


8 


Third 


4,475 
1,050 


- 




2,983 
700 


6 


8 


1,491 
350 


13 


4 




3,425 




2,283 


_6^ 


8 


1,141 


13 


4 



It will be observed that after the second distribution, the shares 
in capital stand in the same proportions as those in profits. It will 



t>ARtNERSHIP ACCOUNTS 113 

be in these shares that any loss on realisation will be apportioned 
between the partners, and, when all assets have been realised and 
distributed the balances to the credit of the partners on their 
respective Capital Accounts will represent their individual shares 
of the loss so chargeable to them. 



CHAPTER XIII 
EXECUTORSHIP ACCOUNTS 

A DIFFERENCE of opinion exists as to whether or not the accounts 
of executors should take cognizance of the value of the estate 
at the date of the testator's death, and this difference finds 
expression accordingly in the two methods upon which these 
accounts are kept, which may be termed respectively the 
" memorandum " and " probate values " systems. 

The former is based upon the theory that an executor is respon- 
sible for the property coming under his charge, but not for its value, 
except such as he may realise. The accounts are, therefore, limited 
to a record of actual cash transactions, with a memorandum or 
note of assets unrealised. The latter system, on the other hand, 
is framed on the principle that the form of the accounts should be 
such as would have recorded, or continued to record, the transac- 
tions of the deceased had he lived and therefore involves, as 
part of the book-keeping entries, a statement of values of 
assets and Habilities affecting the financial position at the date 
of death. 

In the former case, the Estate or Capital Account shows in the 
first instance only the value of such assets as are immediately 
realisable at a definite value, while in the latter it contains a record 
of all assets and liabilities, and thus shows the value of the estate 
as a whole at the date of death. This will be affected subsequently 
by such gains or losses in relation to the values so recorded as may 
occur in the course of administration. 

As both the methods referred to are to be considered sound in 
principle, and are in ordinary use, it is desirable to consider them 
in more detail, as applied to a hypothetical case. 

Thus, suppose A B dies on 15th December, 1918, leaving estate 
as follows — 

£ 

Cash in the house ..... 35 

Balance at bank . . . . . . 182 

Insurance policy, with accrued bonuses. . 1,354 

Consols, ^2,472 14s. 6d. @ (say) ;^56 . . 1,360 

114 



EXECUTORSHIP ACCOUNTS 115 



Freehold Property 
Mortgage .... 
Accrued interest 


*. 1,400 
. 28 


3.500 
1,428 


Less- 
Debts due at death 
Funeral Expenses . 


. 150 
. 63 


7,859 

213 
7,646 



The general method of book-keeping in regard to the particulars 
given will be as follows — 

Memorandum System. The assets and liabiUties of the estate 
as contained in the Estate Duty Account and briefly summarised 
above will be set out in schedule form at the front of the Journal 
or Ledger. (Under this system, it may be noted, the Journal is 
frequently dispensed with, and such transfers as it is necessary to 
record are then made by direct entry upon the Ledger accounts.) 
The schedule thus gives a complete statement of the position at the 
opening date. It should be so arranged as to give facilities for 
record of the disposal or realisation of each asset, by reference to 
Cash Book fohos, if sold, or by note of gifts by way of legacies, or 
of any step or transaction that has removed the original asset from 
the operation of the trust. It will thus in the future form 
a record oi original assets still unrealised. The only entries imme- 
diately made in the books will be in respect of the cash and bank 
balances, both of which, now transferred to the executor's banking 
account, will appear at the debit of the Cash Book, and be credited 
to Estate Account. The Cash Book will thenceforward record all 
receipts and payments in the ordinary manner. The former may 
represent — 

Realisations of original assets and capital. 

Realisations of acquired assets (e.g., investments), 

Income, 
while the latter will include — 

Discharge of liabilities existing at date of death, 

Capital Charges (Estate Duty, etc.), 

Payment for assets acquired, 

Distribution of income, 

Distribution of capital. 



116 



ACCOUNTING 



Amounts received in respect of the original assets will be entered 
in the Cash Book at the sum realised and credited to Estate Account, 
while the realisations of acquired assets will be credited to the invest- 
ment accounts, these having been duly opened by a posting from 
the Cash Book of the amount paid upon purchase. Any balance, 
of profit or loss, upon the asset accounts will be transferred to 
Estate Account. 

In regard to the payments, capital liabilities and charges will be 
debited to Estate Account either direct or indirectly through an 
" interim " account. These will include Debts due at death. 
Funeral Expenses, Estate Duty, Testamentary Expenses, Pecuniary 
Legacies, etc. (It may be observed that legacies other than 
pecuniary are noted as satisfied by a memorandum in the Schedule 
against the assets transferred.) It has already been remarked 
that assets acquired out of capital, such as investments, are 
recorded in the Ledger by opening a distinct account. 

The general treatment of income receipts and payments is 
considered later. 

Probate Values System. Under this method, the Schedule 
is dispensed with, but (in respect of the particulars given) 
comprehensive Journal entries would be made in the following form — 



1918. 












Dec. 15 


Sundries — Dr. 


i 


i 




To Estate A/c 




7.859 




For values of sundry assets at date of death — ' 






Cash in the House . . . . . 35 






Balance at bank . 




182 






Insurance Policy . 




.1 1.354 






Consols. ;^2,472 14s. 6d. at 56 




. 1.360 






Freehold Property 




. 3,500 






Mortgage .... 




., 1.400 






Accrued Interest . 




. 


28 






Estate Account 




Dr. 


213 






To Sundries— 








For liabilities at date of death- 








Debts due at death 


150 




Funeral Expenses 




. 




63 



Estate Account is thus credited upon opening the books with the 
net value of the testator's estate at the date of death. The various 
accounts created by the entries given will not be affected until 
realisation of an asset or discharge of a liability. In the former 
case the proceeds received will be credited to the asset account, and 
in the latter the cash paid will be debited against the balance 



EXECUTORSHIP ACCOUNTS 117 

outstanding, and the gain or loss resulting transferred to Estate 
Account. Inasmuch as Estate Account was originally credited 
with the value of each asset at date of death and is subsequently 
charged with the gain or loss upon realisation, this account ulti- 
mately in effect obtains (in respect of each asset) net credit for the 
amount actually realised. It will be noted that under the alter- 
native system first described the cash received upon sale is to be 
credited to Estate Account, and that both methods, therefore, work 
to a like result. 

In the matter hereafter set out, the proformd examples are for the 
most part framed upon the principles of the " probate values " 
system, while essential differences in treatment of particular entries 
under the two methods are indicated. 

Books of Account. 

The accounts of executors are recorded in Cash Book, Journal, 
and Ledger, which are adapted in manner indicated hereafter to the 
particular features of such accounts. 

The most convenient form of Cash Book is undoubtedly that 
providing separate columns for Capital and Income transactions 
respectively, which will thus distinguish the balances in hand under 
each heading. 

It is important that all transactions should be carried out by 
means of the executor's banking account, all receipts being banked 
and all payments being made by cheque. The keeping of the 
accounts is thereby greatly facilitated. It is desirable also that 
separate banking accounts for Capital and Income be opened as 
soon as possible, so that confusion may be avoided in the application 
of funds in hand. 

In regard to transactions upon Income Account, which will be 
almost entirely receipts, it is usual to post each entry to the credit 
of the particular Investment Account affected and to transfer there- 
from, by Journal entry, to the credit of Income Account; but, where 
the number of investments is small and no difficulty consequently 
arises in observing that the income due in respect of each is duly 
received, it is sometimes preferred to post the total of the Cash 
debit column for Income receipts direct to Income Account, thus 
avoiding the detail postings to, and transfers from, the Investments 
Accounts. 



118 ACCOUNTING 

It has already been observed that the Journal, under the system 
described as " memorandum," is occasionally dispensed with. 
Where used, it serves the purposes of record of the transfers of 
dividends, interest, etc., from the Investment Accounts to the 
credit of Income Account, the transfer of gain or loss upon realisation 
of an asset to Estate Account, and similar entries. 

The form of Ledger usually adopted is one containing two columns 
on either side, for Income and Capital entries respectively, while 
on the debit side a third column is sometimes provided for record 
(in regard to investments more particularly) of nominal values. 

The books of an estate are opened in the manner described, the 
Estate Duty Account, together with any corrective affidavits 
thereof, forming for this purpose a convenient summary of the 
assets and liabilities. It has been thought unnecessary in a work 
of this character to set out in detail the various forms and schedules 
forming the Estate Duty Account. It should be observed, however, 
that the passing of the account and the payment of Estate Duty 
at the proper rate on the total amount of the estate liable thereto 
is a condition precedent to the grant of probate, by which the right 
to act of the executor named in the will is confirmed. It has been 
thought of minor importance also, as affecting the method of keeping 
the accounts, to consider legal questions of liability in regard to 
estate and other duties, and the rates thereof. 

For the purposes of Estate Duty, it is necessary that proper 
evidence of value should support the particulars set out in the 
Estate Duty Account. In the case of investments, this is furnished, 
as regards the majority, by the production of an official list of 
Stock Exchange quotations; as regards other assets, by certificates 
of competent persons, such as inventories prepared and certified by 
recognised valuers, in respect of furniture, pictures, etc., while in 
general it may be said that it is required that the values set out 
should be full and fair. The Stock Exchange quotation is available 
only for shares, etc., included therein, and as to others evidence of 
value may be required to be produced, such as letters from the 
secretaries of the companies, in which the shares, etc., are held. 
Where an official quotation is obtainable, the price stated is usually 
a double one, thus a £5 share may be quoted SxV-xV- For the 
purposes in question, the value to be adopted is the average of 
the lower (SiV) and the mean (5J) prices, that is 5f\. 



EXECUTORSHIP ACCOUNTS 119 

The values of the majority of investments held will be based upon 
official quotations. These will for the most part be cum dividend. 
The opening entries (under the " probate values " method) will 
have the effect of crediting Estate Account with the value of the 
capital proportions of dividends accordingly. There may of course 
be cases where a valuation is based upon a quotation " ex dividend," 
and in which the dividend itself enters into and forms part of the 
value of the estate as sworn. 

The receipt of dividends may, therefore, in part represent a realisa- 
tion of capital. Apportionment will be necessary, the capital 
proportion being placed or left at the credit of the investment 
account in reduction of the value at date of death, and the balance 
transferred to the credit of Income Account. 

Under the alternative method, apportionment is still necessary. 
The accounts, however, deal only with cash, and, in the case of 
apportionable dividends, the simplest and most convenient plan is 
to credit all to a Dividend Apportionable Account, transferring 
therefrom to Estate and Income Accounts in the due proportions. 

The principle of apportionment is determined by the Apportion- 
ment Act, 1870, which enacts that dividends and similar items are 
to be regarded as accruing from day to day and apportionable in 
respect of time accordingly. 

This principle is to be applied in strict accordance with the Will. 
The Will may expressly or by implication preclude apportionment, 
and direct that all amounts of dividends, interest, etc., received 
after the date of death be treated as income. There are also a 
number of cases involving special circumstances, where the Courts 
have given directions as to apportionment not strictly in accordance 
with the general rule. For example, when dividends are received in 
respect of arrears of dividends on cumulative preference shares, the 
Court may on application direct payment to the life-tenant of some 
part of the amount received although relating to a period prior to 
death; again, special rules are applicable in the apportionment of 
income from wasting assets, such as leaseholds, not only as to 
income accrued to the date of death, but subsequently. 

The subject of apportionment is intricate, and legal opinion on 
questions involved is often essential. 

Where an interim dividend has been received by the testator, 
and a final dividend (at a higher rate) is received by the executors, 



120 ACCOUNTING 

both are brought into account for apportionment. After ascertain- 
ing the proportion of the whole due to be treated as capital, the 
amount of the interim dividend already capitalised will be deducted, 
and the balance of the capital proportion retained from the final 
dividend. 

Under such circumstances as those last referred to, capital never 
refunds; receipts and payments made by the testator are, so to 
speak, closed transactions. The apportionment may show that 
capital has had (in the interim dividend) more than its due share of 
the whole; the facts may be that capital has, as regards payments, 
disbursed sums prior to death [e.g., rates in respect of property) 
which, if they had been paid by the executors, would partly have 
affected income; apportionment will only be made of the executor's 
transactions. These may give further credit to Estate Account, or 
throw a portion of expenses upon it, but will not disturb the 
transactions of the testator. 

The principal occasion for apportionment arises upon the tes- 
tator's death, although it may not then be necessary in all 
cases. Need may, however, also arise for apportionment as 
between successive tenants-for-life, or between life-tenant and 
remainder-man . 

It is impossible in a work of this nature to deal exhaustively with 
the many problems arising upon questions of apportionment. To 
the accountant student who may deal with the accounts of executor- 
ships and trusts, a general knowledge of the principles involved 
is essential, and reference to works dealing more exclusively with 
this branch of law is desirable. 

Illustration. A testator died on 19th October, 1919, 
leaving his estate in trust. The executors receive the following 
amounts — 

1919. I s. d. 

Oct. 31. John Brown & Sons, Ltd, — Final dividend for year 
ending 30th June, 1919, on 800 shares {£\ each) at 
rate of 15 % p.a., less tax, making with interim 
dividend (paid Jan. 1919), 10 % for the year . . 56 5 - 

Nov. 10. Abel Thomas, Ltd. — Dividend for year ending 31st 

Oct., 1919, on 500 £\ Ordinary Shares @ 6 %, less tax 28 2 6 

Dec. 25. Rent, Rose Villa, for quarter to date (Sept. 29-Dec. 25) 25 - - 

1920. 
Jan. 15. Henry Thompson & Sons, Ltd. — Final dividend for 
year ending 31st Dec, 1919, on 500 shares of £2 each 



EXECUTORSHIP ACCOUNTS 121 

i s. d. 
at 12 % p,a., less tax, making with interim dividend 
(paid July. 1919), 8 % for the year— £ s. d. 

(Dividend 30 - - 

£ s.d. 
Less tax @ Is. 6Jd. . 2 6 3 

„ ,» „ 4id. on interim 
dividend ... 39 

2 10 - 

27 10 - 

Note. — It is assumed that tax was deducted from the Interim Dividend 
at Is. 2|d., and that under the provisions of the Finance Act, 1919 (Session 2), 
a further 4 Jd. is deductible on account thereof from the final dividend, the rate 
for the year being the average of Is. 2d. for the period 1st Jan. to 5th April, 
and Is. 8d. for the period 5th April to 31st Dec. 

Mar. 25. Rent, Rose Villa, for quarter to date (Dec. 

25-Mar. 25) 25 - - 

Less, property tax for year to 5th April, 

1920 6 18 8 

18 1 4 

The method of apportionment in respect of these transactions 
is shown on page 122. 

A more detailed explanation by means of pro forma accounts of 
the general methods of the " probate values " system is now given. 
Problem. A. Howard died on 31st January, 1919, leaving the 
following estate — 

Railway Ordinary Stock £5,000, valued at 85 per cent. 
Railway 3 per cent. Preference Stock £10,000, valued at 77 
per cent. 

Railway 3 per cent. Debenture Stock £8,000, valued at 80 
per cent. (Interest payable 1st January and 1st July). 

Loans on Mortgage at 4 per cent. £10,000 (Interest due 25th 
March and 29th September). 

Chief Rents £85 a year, valued at 25 years' purchase (due 25th 
March and 29th September). 
Life Policies £5,000. 
Household Effects valued at £1,500. 
Debts due by Testator £150. 
He left £250 each to his two executors, £250 to a nephew, and 
£3,000 to charities, all free of duty, and the residue of the estate 
in moieties to his son and daughter. 

The Railway Ordinary Stock was sold on 1st March, 1919 (immedi- 
ately after the receipt of the final dividend for 1918 at 5 per cent, per 
annum), at a profit of £250; the Life Pohcy money was received, 
and £1,520 reahsed from the sale of the household effects. 

9—(1377) 



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122 



EXECUTORSHIP ACCOUNTS 



123 



Assume the receipt of all interest and dividends on investments 
as they became due, also that Estate Duty was paid on 30th 
June, 1919, and Legacy Duties, Debts owing, and Funeral (£120), 
and Executorship Expenses (£380) on 30th September, 1919. 

Write up the books to 30th September, 1919, and prepare Corpus 
and Income Accounts on that date. 

Ignore Income Tax. 

A. HOWARD (DECEASED). 



ESTATE ACCOUNT. 



Or. 



1919. 
Jan. 31 



To Sundry Creditors 
Funeral Expenses 
Balance . 



June 



To Estate Duty at 6 % 
„ Executorship Exs. 
„ Legacies . 
,, Balance . 



i 

150 

120 

36,874 



37,144 



2,212 

380 

4,112 



37.144 



10 



1919. 
Jan. 31 



1919. 
Oct. 1 



By Railway Ord. Stock . 
RaUway 3 % Pref. Stk. 
RaUway 3 % Deb. Stk. 
Loans on Mortgage 
Interest accrued on do. 
Chief Rents, Capital 

value . . . . 
Rents accrued 
Life Policies . 
Household efiects . 



By Balance . . . . 

„ Railway Ord. Stock, 

profit on realisation . 

„ Household efiects, ditto. 



By Balance 



i 
4,250 
7,700 
6,400 
10,000 
140 

2,125 

29 

5,000 

1,500 



37,144 



36,874 

250 
20 

37,144 



30.439 



Dr. 














CASH. 










Cr. 










Income. 


Capital. 


1919. 




Income. 


Capital. 


1919. 


f 


s. 


d. 


i 


s. 


d. 


i 


5. 


d. 


i 


s. 


d. 


Mar. 1 


To Final divd. 
on Railway 
Ord. Stock 

„ Dividend on 
R'way 3 % 
Pref. Stock 

„ Proceeds of 
R'way Ord. 








125 
150 


- 


- 


June 30 
Sept. 30 


By Estate Duty 
„ Int. thereon 
„ Sundry Cre- 
ditors . 
„ Funeral exs. 
„ Executorship 
expenses . 
„ Legacies — 


27 


' 


7 


2,212 

150 
120 

380 


9 


10 




Stock . . 








4,375 




~ 




1st Exec. . 








250 


— 


— 




„ Life Policy . 
„ Household 








5,000 


- 


- 




2nd Exec. 








250 




- 


















Nephew . 








250 




- 




effects. 








1,520 


— 






Sundry 
Charities . 














„ 25 


„ Interest on 






















3,000 


- 


- 




Mortgage . 


59 


17 


9 


140 


2 


3 




, Legacy 
















„ Chief Rents 


12 


14 


6 


29 


15 


6 




duties . 








362 


10 


— 


July 1 


„ Interest on 
R'way Deb. 
Stock . 


100 






20 








„ Balance 


512 


16 


8 


4,409 


17 


11 


Aug. 15 


„ Divd.onRly. 
3 % Pref. 
Stock . . 


125 






25 






















Sept. 29 


„ Interest on 

Mortgage . 
„ Chief Rents 

To Balance 


200 
42 

540 

512 


10 
2 
16 


3 

"s 












540 


~2 


3 










11,384 


17 


9 










11,384 


17 


9 


Oct. 1 


4,409 


17 


11 















124 



ACCOUNTING 



Dr. 



A. HOWARD (DECEASED). 
INCOME ACCOUNT. 



Cr. 



1919. 
June 30 
Sept. 30 



To Interest on Estate Duty 
,, Balance . . . . 



£ 

27 
512 


s. 

5 
16 

2 


d. 
7 
8 

3 


1919. 
Sept. 30 

Oct. 1 


540 









By Interest on Mortgage . 
Chief Rents . 
Interest on Railway 

Deb. Stock. 
Divd. on Railway 3 % 

Pref. Stock . 



By Balance 



259 
55 


s. 
17 
4 


100 


- 


125 


- 


540 


2 
16 


512 



Dr. 



BALANCE SHEET. 
As AT 30th September, 1919. 



Cr, 



To Estate Account- 
Son . . 
Daughter 

„ Income Account- 
Son . 
Daughter 



£ s. d. 

15,219 18 11 
15,219 19 - 



256 8 
256 8 



30.439 



512 



30.952 



By £10,000 Rly. 3 % Pref. Stock . 

„ £8,000 Rly. 3 % Deb. Stock . 

„ Loan on Mortgage 

„ Chief Rents .... 

„ Cash — 

Estate A/c . 4,409 17 11 
Income A/c . 512 16 8 



£ 
7,525 
6,380 
10,000 
2.125 



4,922 
30.952 



The authority and powers of executors in regard to investments 
are derived from the Will. In so far as the Will does not hmit 
their powers, they are entitled to invest the fund under their charge 
in securities authorised by the Trustee Act, 1893, and Colonial 
Stock Act, 1900; but the Will may give them wider scope. 

The directions of the testator may involve the separation of the 
estate into distinctive trust funds, each designated for a particular 
purpose. Capital and income will thus be held and applied for 
and on account of the objects specified. Thus, a testator may direct 
the executors, whom he also constitutes trustees, to pay his debts, 
funeral expenses, estate duties and pecuniary legacies, and to deal 
with the balance as follows — 

(1) As to £10,000, to invest for the benefit of his daughter A and 
her children, with life-interest to A and remainder to the children. 

(2) As to £10,000, similarly for his daughter B and her children. 

(3) As to the balance (residue), to hold in trust to pay £1,500 
per annum to his widow for life, with remainder to his five children, 
including A and B, their shares being settled on the same terms as 
the specific trusts referred to. 

In such circumstances, it would be necessary for the executors 
to ascertain the assets under their control after satisfying all 



EXECUTORSHIP ACCOUNTS 



125 



immediate charges on the estate. For the latter purpose, some 
assets would have to be realised, and the executors would no doubt 
find it a convenience to sell for this purpose some or all of such 
investments as, having regard to the terms of the will, they found 
it beyond their powers to retain. 

In the books of account, transfers would be made from Estate 
Account to the credit of A, Trust Capital Account, and B, Trust 
Capital Account of £10,000 to each respectively. The balance of 
Estate Account represents the capital available for the purposes of 
the trusts in regard to residue. 

In regard to each separate trust, specific investments must be 
acquired or retained from the general assets for the express purposes 
of each. It is not necessary that the investments be purchased, 
but sufficient if they are expressly appropriated. Appropriation will 
be made at the values of the investments at time of appropriation, 
and subsequent gain or loss upon those values wiU affect the capital 
of the trust alone of which the particular investments form part. 

The separation of capital in the circumstances indicated involves 
also the separation of income received, in relation to each trust. 
When the values of capital and the numbers of investments held 
are high, it may be desirable that the accounts of each trust be 
recorded in a distinct set of books. 



ESTATE ACCOUNT. 



To A, Trust Capital A/c . 
„ B, 
„ Balance carried down . 


£ 
10,000 
10,000 
30,302 


s. 


d. 


By Balance 

By Balance brought down . 


50,302 


5. 


d. 




50,302 


- 


= 


50,302 


= 


- 








30,302 


- 



A. TRUST CAPITAL ACCOUNT. 



To Loss on realisation of 

Consols . 
„ Balance, carried down 




By Estate A/c . 
„ Profit on realisation of — 

L. & N.W.R. 4 J % 
Deb. Stock . 

Midland Rly.Deb.Stk 



By Bal^npe brought down . 



10.000 



102 
54 



10,156 



9,816 



126 



ACCOUNTING 
B. TRUST CAPITAL ACCOUNT. 



To Loss on realisation of 

Queensland 4 % Stock 

„ Balance carried down . 



160 
9,840 


s. 


d. 


10,000 


- 


- 









By Estate A/c . 



By Balance brought down. 



£ 

10,000 



10,000 



9.840 



d. 



Note. — The charge (if any) for Settlement Estate Duty has not been 
dealt with. 



Upon the facts submitted, the general estate will have to be 
further dealt with upon the death of the widow. The value will 
be ascertained at that date and the absolute interests satisfied. 
In this event also, payment in cash is not essential, and investments 
can be appropriated at their true values in part satisfaction of the 
balance due. The value of that part of the estate still to be held 
in trust for the benefit of A and B and their respective children 
will be transferred to and form part of the capital of their respective 
trusts. 

The method referred to of appropriation of securities in whole 
or part satisfaction of distinctive interests impUes valuation. It 
is advisable that this be expressed in the books of account. The 
various accounts of assets, investments, property, etc., will therefore 
be adjusted to the true values as at the agreed date of distribution 
or transfer, the entry being completed by a debit or credit upon 
Estate Account for loss or gain upon the revaluation as a whole. 
Estate Account will then represent the value of the trust property 
as at the date of division, and the credit balance thereon can 
be transferred to the accounts of those interested in the proper 
shares. 

In the case submitted, the shares of the daughters will be passed 
to the credit of their Trust Capital Accounts and those of the sons 
to the credit of their accounts. The latter will perhaps be satisfied 
in part by securities appropriated; these will be transferred to them, 
the accounts of the investments, etc., affected being closed and 
those of the sons debited. In the cases of the shares in trust, 
these will be represented by investments retained, specifically noted 
as held for the account of one or both of the trust funds. It may 
possibly at this stage be convenient to open fresh books for record 
of future transactions in regard thereto. 



EXECUTORSHIP ACCOUNTS 



127 



Appropriation of securities at valuation can seldom be made 
in exact and full satisfaction of the amount due, and balances usually 
remain, debit or credit, for discharge in cash. 

This form of settlement (by appropriation) proceeds on the 
assumption that the executors could, on a date fixed, have converted 
the estate into cash at the values ascertained, and that no unfairness 
therefore results from transfer of that value in a form other than 
cash. The revaluation of the estate as a whole, however, takes 
time, and effect cannot be given to the arrangements proposed by 
immediate transfer. In the interval, values may alter, and a 
beneficiary may consider himself or herself adversely affected by 
inability to realise at the date of transfer the value at date of 
revaluation. It is desirable that the trustees should protect them- 
selves by obtaining the consent of all parties to the proposed 
arrangement and by a full discharge from the beneficiaries. 

The pro forma accounts submitted illustrate the form of the 
adjustments required in the books of account. 

ESTATE ACCOUNT. 



To Sundry Investments, 
loss on revaluation . 
4^ % War Loan . 
Pennsylvania Railroad 

4 % Bonds 
New Zealand Govt. Loan 
Cape of Good Hope Govt. 

Loan 
Fumess Railway 4% Stk. 
North British Railway, 

3 % Pref. Stock. 
Great Western Railway 

Deb. Stock 
London & N.W. Railway 

Deb. Stock 
Caledonian Railway Deb. 

Stock 
Consols 
,, Balance carried down . 



To A, Trust Capital A/c 
M B, „ ,, 

„ C . . . 



50 

220 
134 

80 
40 

24 

120 

18 

30 

286 

30,080 


s. 


d. 


31,082 


] 


" 


6,016 
6,016 
6,016 
6,016 
6,016 


30,080 


- 


- 



By Balance brought down 
„ Freehold Land, gain on 
revaluation 



By Balance brought down. 



30,302 
780 


s. 


d. 


31,082 




- 


30,080 


- 


30,080 


J 


z 



128 



ACCOUNTING 



To Sundry Investments 

transferred in part 

satisfaction of interest, 

viz. — 

Fumess Rly., £2,000 4 % 

Stock 
North British Rly., £800 

3 % Pref. Stock. 
Great Western Rly., 

£3,000 4 % Deb. Stock 

London & N.W. Rly., 

£600 3 % Deb. Stock. 

„ Cash .... 



i 


s. 


d. 


1,640 


_ 


~ 


442 






2,985 




- 


475 
473 


5 
15 


- 


6,016 


sm. 


OS 



By Estate A/c. 



£ 
6,016 



6,016 



Note. — Legacy Duty has not been dealt with. The values of investments 
as dealt with are assumed as correct. 

Examples of entries necessary upon the investment accounts are 
given on page 129. 

Advances. 

Executors may, where the Will permits, make advances to bene- 
ficiaries on account of their respective shares. Such advances will 
usually be subject to interest. If, for example, an estate of the 
approximate value of £50,000 and producing (say) £2,000 a year, 
is held in trust for the purpose of paying an annuity of £1 ,000 per 
annum, the executors may, with power given in the Will, agree to 
a distribution of (say) £15,000 to the residuary legatees, still retaining 
a sufficient proportion of the capital to cover the annuity payable. 
If it be assumed that there are five beneficiaries, it is immaterial 
as between them if the amount of £15,000 is equally divided. If, 
however, the distribution is unequal, thus — 

£ 

A 6.000 

B 4.000 

C 5.000 

D Nil 

E Nil 

an adjustment by way of interest is required if the beneficiaries 

are to be compensated for the unequal loss in respect of the surplus 

income formerly received by them. 

As a matter of book-keeping. A, B, and C will be debited with 

interest (usually at the rate of 4 per cent, per annum, although, 

by reason of the general advance in rates of interest in recent years, 

a greater rate may now be proper) on the amounts advanced 

to them respectively and Income Account credited, The latter 



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129 



130 ACCOUNTING 

account (now showing a credit of an amount approximately equal 
to the income from the original estate) will be charged with the 
annuity and the surplus divided amongst A, B, C, D, and E as in 
the past. 

In the final distribution of the estate, the amounts advanced will, 
of course, be brought into account. Thus, assume the balance of 
the estate retained by the executors to be revalued as at the date 
of death of the annuitant at — 

I 

32,000 
For the purpose of arriving at the value for 

distribution the advances will be added . 15,000 



Total 47.000 

The gross share of each beneficiary will thus be one-fifth of £47,000 
(i.e., £9,400), against which the amount advanced to each will be 
brought into account. 

When advances are made, the usual course is to debit them, not 
to Estate Account, but to the account of the beneficiary concerned, 
and to divide the credit balance on Estate Account in the proper 
shares amongst the persons entitled, irrespective of advances made. 



CHAPTER XIV 

COMPANY ACCOUNTS 

The steps involved in the formation and registration of a Limited 
Company do not of themselves necessarily introduce problems 
concerning the accountant. 

Arising out of registration, however, is the necessity for holding 
of the statutory meeting, at a date not less than one month nor 
more than three months from the date on which the company is 
entitled to commence business. To this meeting must be submitted 
the " statutory report," and this will ordinarily be prepared by the 
company's accounting officer. 

The extracts given on pages 132-135 from the form of statutory 
report usually adopted are subject to the limitation that, as regards 
a private company, it is necessary neither to file the report, nor to 
forward it to members. 

Acquisition by a Limited Company of a Business as a Going Concern. 

A Limited Company contains, in the clauses of its Memorandum 
of Association, wide powers, many of which it may never exer- 
cise, but it is as a rule formed with the intention of carrying 
on business within certain more or less definite limits. It may 
originate its business; it may, on the other hand, acquire and develop 
an existing business. 

Where acquisition is by a public Limited Company, formed for 
the purpose, the terms will appear in and form an important feature 
in the prospectus. In making a statement of these terms, the 
promoters will desire complete security in regard to fulfilment 
of the contract by the vendor. This will be obtained by the 
execution, prior to incorporation, of a contract between the vendor 
and a person acting as trustee for the proposed company. The 
vendor will thus be bound, while the company can at its option 
take over the contract from the trustee. Should it not do so, the 
trustee, having purported to act as agent for a non-existent prin- 
cipal, is personally liable, but the contract usually reserves power 
to him to rescind and so reHeve himself of Uability. 

The terms of such contracts ordinarily include provisions for the 

131 



J.S. 26. 

Number of J 
Certificate ) 



.157,329. 



*'THE COMPANIES ACTS, 1908 TO 19 17.*' 
REPORT 



(Pursuant to Section 65 of the Companies 
(Consolidation) Act, 1908.) 



OF 



o 



A 5/- 

Companies 

Registration 

Fee Stamp 

must be 

impressed 

here. 



.Blank Company Limited. 



(1) Here state as 
" fully paid up " or 
" paid up otherwise 
than in cash to the 
extent of 

per share." 

(2) Here state con- 
sideration for which 
they have been 
allotted. 



1. The total number of shares allotted is... 10,000 

2. Of the shares so allotted 4,000 have been 

allotted on the footing that they are to be paid for in cash 

on the terms mentioned in the Prospectus, and £....2 lOj- 

has already been paid up on each share. The residue of such 

shares, viz.: 6,000 have been allotted {^)... .as fully.... 

....paid up 

in consideration of {^) assets, goodwill, and other 

....consideration as set out in the agreement dated 15th 

....September, 1919, made between Alfred Jones, as Vendor,.... 
....Robert Johnson, as Trustee, and the Company 

3. The total amount of cash received by the Company in 

respect of the. ...4,000 shares issued wholly for cash is 

£....10,000 and on the shares issued 

partly for cash is £ 

4. The following are the Receipts and Payments of the 
Company on Capital Account to the date of this Report — ♦ 



Particulars of Receipts. 


Particulars of Payments. 

1 1 1 


Share Capital — 

4,000 shares of £5 each, 

£2 101- paid 
Debentures bearing interest 

at 5% . 


10,000 
10,000 






Alfred Jones, cash per 

Agreement dated 15/9119 
Wm. Jones 6- Son, 

building contractors, on 

account 
Purchase of Machinery 

and Plant 
Patents acquired . 
Underwriting Commission 
Preliminary expenses 
Revenue payments 

Balance at London, City 
S- Midland Bank 


10,000 

2.000 

2,000 

500 

500 

2,200 

1,000 




- 




18,200 
1,800 


~ 


_ 




20,000 


- 




20,000 


- 


- 



* The receipts from shares and debentures and other sources and the payments thereout must be 
shown under distinctive headings^and particulars must be given concerning the balance remaining in hand. 

Presented for filing by 

Robert Johnson 

, Secretary, Blank Company, Limited 

, 8 Cook Street, Liverpool .,„ 

132 



5. The following is an account or estimate of the Preliminary Expenses 
of the Company. 



Stamp duties and fees in respect of incorporation 
and of assets, etc., transferred and acquired . 

Legal and accounting charges .... 

Printing of Memorandum and Articles of Association, 
prospectus, etc. 

Advertising, etc. ....... 

Underwriting commission and brokerage 


1,800 
262 

100 
250 
600 


10 


z 


£ 


2,912 


10 


- 









6. The following are the Names, Addresses and Descriptions of the 
Directors, Auditors (if any), Manager (if any) and Secretary of the 
Company. 

DIRECTORS. 



Surname. 


Christian 
Name. 


Address. 


Description. 


Bowes 
Jones 
Maddox 


Alfred 
Alfred 
Henry 


18 Leadenhall St., 
London, E.C. 

73 Crown St., 
Manchester 

15 Sunhourne Rd., 
Hampstead, 
London, N.W. 


Merchant 
Ironfounder 
Company promoter 



133 



AUDITORS. 



Surname. 


Christian 
Name. 


Address. 


Description. 


Hartley 


James Henry 


15 Cheapside, 
London, E.C. 


Chartered 

Accountant 



MANAGER. 



Jones 




73 Crown St., 
Manchester 



Ironjounder 



SECRETARY. 



Johnson 



Robert 



8 Cook St., 
Liverpool 



Clerk 



7. The following Contract 
for modification and approval, viz. 



to be submitted to the meeting 



(1) Here state (1) 
shortly particulars 
of agreement. 



Nil. 



(2) Here state The proposed modification as follows — (2) 

shortly the proposed 
modification. 



184 



We hereby certify that this l^eport is correct 



A. Bowes '\ 

y Directors. 
.Alfred Jones ) 



I hereby certify that so much of this Report as relates to the shares 
allotted by the Company and to the Cash received in respect of such shares 
and to the receipts and payments of the Company on Capital Account is 
correct. 



J. H. Hartley ) 

{ Auditor. 



Dated this Fourteenth 

day of October 19....20. 



NOTE. — This Report must be certified by not less than two Directors of the 
Company, or where there are less than two Directors, by the sole Director and 
Manager, and so far as it relates to the allotment of shares, to cash received 
in respect of shares and to the receipts and payments on capital account by 
the Auditors if any, and must be forwarded at least seven days before the day 
on which the Statutory Meeting is to be held to every member of the Company, 
and a copy must be filed with the Registrar of Joint Stock Companies 
forthwith after it is so forwarded. See Section 65 (2) (3) (4) and (5) of the 
Companies (Consolidation) Act, X908. 



135 



136 ACCOUNTING 

transfer of the business as and from a definite past date, usually that 
of the last Balance Sheet. It is further provided, as a rule, that 
until transfer to the company, the vendors will carry on the business, 
as agents for the trustee until the company is formed and thereafter 
as agents for the company; which thus acquires the benefit or 
burden of profits or losses, as the case may be, from the date stated. 

The Vendors' Agreement will provide as to the manner in which 
the consideration is to be satisfied. This may be as to whole or 
part by cash, shares and debentures, and will be subject to 
assessment to stamp duty under the Stamp Act, 1891. 

The statement on page 137 shows a form in which it is desirable 
to set out the particulars relating to the subject-matter of sale 
and purchase in order that the duty may be correctly assessed. 

It is to be observed that Conveyance Duty is payable only upon 
certain assets, and that others, such as stock-in-trade, cash in hand, 
and the balance of a Bank Current Account, are exempt; further, 
that in calculating the total consideration, account is to be taken 
of the Habilities adopted by the purchaser, that is, that these are 
reckoned as part thereof. The assets specified by the Stamp Act, 
1891, as free from duty under that statute include the legal interest 
in freeholds, leaseholds, etc., and shares and other marketable 
securities. These are not wholly exempt as they are transferable 
by specific contracts, which are themselves liable to assessment 
to stamp duty. The exact Hability in any particular case is, how- 
ever, a matter dependent largely on the interpretation of the 
statutes having reference thereto, and does not primarily concern 
the accountant. 

Issue of Share Capital. 

A Limited Company offers for subscription £500,000 of Preference 
and £500,000 of Ordinary Share Capital, all in shares of £i each, 
payable as follows — 

Preference, Ordinary. 
1919. s. d. s. d. 

On application . . Jan. 1 2 6 2 6 and premium Is. 

On allotment . . Jan. 10 2 6 2 6 

First Call . . Mar. 1 7 6 7 6 

Second Call . . June 1 7 6 7 6 

The applications received are as follows — 

Preference Share Capital . . . 600,000 shares 

Ordinary do. ... 800,000 „ 



Re. 



.and. 



Apportionment of Consideration in respect of Agreements chargeable 
under Section 59 of the Stamp Act, 1891, 
and Section 73 of the Finance (1909-10) Act, 1910. 

Total Consideration. 

The attached instrument appears to be Cash, Shares, etc. £ 

liable to Vendor's liabilities 

ad valorem Conveyance Duty, under Section (Mortgages, &c.) 

59 (1) of the Stamp Act, 1891. The considera- assumed by the 

tion, i.e., the amount payable in cash, shares, purchaser . . £ 

or debentures, plus the liabilities assumed by 

the purchaser, should be apportioned under Total . . . £ 

the appropriate heads, viz ■ ■ ' ■ =«=» 

Goodwill £~ 

Tenant's and Trade fixtures and fittings . £- 

Book and other debts (including money on 

Deposit at Bank or elsewhere) . . £-'.■ 

Benefit of Contracts .... £- 

Patents, Designs, Trade Marks, Licences, 

and Copyrights ..... £- 

Equitable estates or interests in land of 
whatever tenure, whether in the United 

Kingdom or abroad .... £ -■— ■■ •■ » =^ --- =» 

Consideration upon which ad valorem 

Conveyance Duty is payable.... £ 

Legal interest in freeholds, leaseholds, and 

copyholds ...... £- 

Loose plant and machinery, stock-in-trade, 

furniture ...... £- 

Foreign property (other than above) . £- 

Ships £- 

Cash in hand or on current account at 

bankers, bills of exchange, etc. . . £- 



Total consideration 



Signature and date 

As the amount of the stamp depends upon the apportionment, the different 
sums should be written in the margin of the instrument, or on this form. 
If no apportionment can be made, duty is chargeable on the total 
consideration passing. 

Inland Revenue Office, 

Somerset House, London. 

No. 22. 



137 



10— (1377) 



138 



ACCOUNTING 



The Directors decide to refuse applications received in respect 
of 50,000 Ordinary Shares, and to allot pro rata in regard to the 
remainder, namely, as to Preference Shares, five-sixths, and as to 
Ordinary Shares, two-thirds, of the amount applied for. 

The entries are as follows — 



1919. 



Jan. 1 



Jan. 10 



Jan. 10 



Mar. 1 
-June 1 



Sundries. Dr. 

To Sundries — 

Ordinary Share Capital Application A/c 
Preference „ „ „ 

Ordinary Share Capital A/c . 
Preference ,, „ „ . 

Premium on Shares A/c 
For amounts payable on application and 
allotment, viz. — 

Ordinary Shares, 3s. 6d. per share 
Preference „ 2s. 6d. 



Sundries. Dr. 

To Sundries — 

Ordinary Share Capital Allotment A/c 
Preference ,, ,, ,, 

Ordinary Share Capital A/c 
Preference ,, ,, . , 

For amounts payable on allotment, viz. — 
Ordinary Shares, 2s. 6d. per share 
Preference ,. 2s. 6d. 



Sundries. Dr. 

To Sundries — 

Ordinary Share Capital Application A/c . 
Preference ,, ,, ,, 

Ordinary Share Capital Allotment A/c 
Preference ,, ,, ,, 

Amounts received from sundry share- 
holders on application carried forward to 
their credit against moneys due on allotment 



Sundries. 

To Sundries — 

Ordinary Share Capital Calls A/c 
Preference ,, ,, ,, 

Ordinary Share Capital A/c 

Preference ,, „ 

Calls receivable. 



Dr. 



87,500 
62,500 



62,500 
62,500 



43,750 
12.500 



375,000 
375,000 



62,500 
62,500 
25.000 



62,500 
62,500 



43,750 
12.500 



375,000 
375,000 



Dr. 



COMPANY ACCOUNTS 
CASH BOOK. 



139 

Cr. 



1919. 




£ 


1919. 




£ 


Jan. 1-5 


To Ordinary Share Capital, 
Application A/c, cash re- 
ceived on Application 




Jan. 10 


By Ordinary Share Capital, 
Application .Kjc, amount 
returned, being cash re- 






for 800,000 shares 


140,000 




ceived on apphcation for 






„ Preference Share Capital, 






50,000 shares 


8,750 




Application A/c, cash re- 




Jime ^1 


„ Balance carried down 


1,025,000 




ceived on application for 












600,000 shares 


75,000 






. 


Jan. 10 


,. Ordinary Share Capital, 
Allotment A/c, balance 
due on allotment on 
500,000 shares . 

„ Preference Share Capital, 
Allotment A/c, balance 
due on allotment on 
500,000 shares 


18,750 
50,000 








Mar. 1 


„ Ordy. Sh. Cap. 1st Call A/c 


187,500 
187,500 








June 1 


„ Ordy. „ 2nd Call A/c 
„ Pref. „ 

„ Balance brought down . 


187,500 
187,500 










1,033,750 


1,033,750 


June 1 


1,025,000 





ORDINARY SHARE CAPITAL APPLICATION ACCOUNT. 



1919. 
Jan, 



To Sundries 

„ Cash . . . . 

„ Ordinary Share Capital, 

Allotment A/c • 




By Cash 



£ 

14U.000 



140,000 



ORDINARY SHARE CAPITAL ALLOTMENT ACCOUNT. 



1919. 
Jan. IC 



To Ordinary Share Capital 
Account 



£ 

62,500 



62,500 



1919. 
Jan. 10 



By Ord. Share Cap. Applica- 
tion A/c 
.. Cash . 



43,750 
18.750 



62,5C0 



PREFERENCE SHARE CAPITAL APPLICATION ACCOUNT. 



1919. 

Jan. 1 

.. 10 



To Preference Share Cap. A/c 
„ Preference Share Cap. 
Allotment A/c 




By Cash 



£ 

7a,000 



75,000 



PREFERENCE SHARE CAPITAL ALLOTMENT ACCOUNT. 



1919. 
Jan. ICTo 



Preference Share Capital 
Account 



£ 

62,500 
62,500 



1919, 
Jan. 10 



By Pref. Share Capital Appli- 
cation A/c , 
„ Cash . . . , 



12,500 
50,000 



62,500 



140 



ACCOUNTING 



ORDINARY SHARE CAPITAL CALLS ACCOUNT. 



1919. 

Mar. 1- 

Jiine 1 



To Ordinary Share Cap. A/c 



£ 

375,000 



375,000 



1919. 
Mar. 1 
June 1 



By Cash 



i 
187,500 
187,300 



375,000 



PREFERENCE SHARE CAPITAL CALLS ACCOUNT. 



1919. 
Mar. 1- 
June 1 



To Preference Share Cap. A/c 



£ 

375,000 



1919. 

Mar. 
June 



By Cash 



£ 
187,500 
187,500 



375,000 



ORDINARY SHARE CAPITAL ACCOUNT. 



1919. 
June 1 



To Balance carried down 



£ 
500.000 



500,000 



1919. 
Jan. 1 
10 
June 1 



1919. 
June 1 



By Ord. Share Cap. Appl. A/c 

„ Allot. A/c 

„ „ „ „ Call A/cs 



By Balance brought down 
PREFERENCE SHARE CAPITAL ACCOUNT. 



£ 

62,500 

62,500 

375,000 



500,000 



500,000 



1919. 
June 1 



To Balance carried down 




By Pref. Share Cap. Appl. A/c 
„ ' „ „ „ Allot. A/c 
„ „ „ „ Calls A/OS 



Balance brought down 
PREMIUM ON SHARES ACCOUNT. 



£ 

62,500 

62,500 

375,000 



500,000 



500,000 



1919. 
Jan. 1 ;By Ord. Share Cap. Appl. A/c | 



i 
25,000 



The illustration submitted has dealt with the entries required 
upon the assumption that appHcations have been received for 
shares to a value greater than the amount offered for subscription. 
In respect of applications not accepted, it is necessary that the 
cash received should be returned. It is obvious that from this 
reason and from the fact that the applications in respect of which 
allotments are made have probably been received from a large 
number of applicants, the entries in the books of account, were 
these to be made in detail, would be numerous. It is the practice, 
therefore, as a matter of convenience, to record the transactions 
relative to applications for, and allotment of, shares, upon Appli- 
cations and Allotment Sheets in the following or some similar 
form. 



go 






Q 










ll 










«:o- 








*; I 


Balance 

due on 

Allotuieii 






i 

Ill- 


^ 




6 




No. of 
Allot- 
ment 
Letter. 




^1 




o S 






















1 




^ 











HI 



142 



ACCOUNTING 



The information given by the AppHcation and Allotment Sheets 
will form the basis of the opening entries relating to Share Capital. 
The form given can without difficulty be adapted to include the 
particulars relating to calls, but separate sets of sheets will be 
required for distinct classes of shares, if confusion is to be avoided. 
The distinction is usually emphasised by the use of printed forms 
of application in different colours, one for each class of appUcation. 
It is customary, where any considerable number of shares is issued, 
for applications to be forwarded direct to the bankers of the com- 
pany, who, after record of the remittances, acknowledge receipt 
to the applicants by detaching and returning the forms of receipt 
attached to the applications and forward the latter to the company's 
office. 

The Application and Allotment Sheets are written up from the 
forms of application as received, but it is desirable that prior to 
allotment they should be re-written in approximately alphabetical 
order. The posting of cash received on allotment is thereby 
facilitated. When allotment has been completed and the cash 
immediately due has been paid, the particulars contained on the 
Application and Allotment Sheets, so far as they relate to the shares 
actually allotted, can be transferred to the Share Ledger. 

FORM OF SHARE LEDGER. 



Name. 



Address 

Occupation. 



Date of becoming a member 
„ ceasing to be „ 



Sharks Tran.sferred. 


Shares Allotted or Acquired. 


Balances. 




Fo. 


Distinctive Nos. 


No. of 
Shares. 


Date. 


Fo. 


Distinctive Nos. 


No. of 
Shares. 




No. of 
Shares. 


Date. 


From. 


To. 


From. 


To. 



























The above form is applicable where the shares are fully paid 
prior to entry in the Share Ledger. Where this is not the case, 
it is usual to provide, under the heading and above the ledger 
ruling of each folio of the Share Ledger, a Cash Account, showing the 
9Lmounts and due dates of calls and the record of the amounts 



COMPANY ACCOUNTS 



143 



received in respect thereof. The form given comprises all par- 
ticulars necessary to be shown in the Register of Members and 
fulfils all legal requirements in respect of the latter. 



Dr. 


CASH 


ACCOUNT (FOR SHARE T.RDGER). 




Cr. 






Date. 


Particulars of Call. 


Fo. 


Amount 
clue. 


Date. 


Particulars. 


Fo. 


AmoHnt 
received. 



























Acquisition of a Business by a Limited Company (continued). 

For the purposes of illustration, it is assumed that a Limited 
Company is formed with an authorised capital of £1,000,000, divided 
into 500,000 of Preference and a Uke number of Ordinary shares, 
all of £1 each, and that the clauses of the Memorandum and Articles 
of Association state that one of the main objects of the company 
is to acquire and to carry on a manufacturing business as therein 
named. 

The company is incorporated as a public company on the 1st 
January, 1918. A prospectus is issued, inviting applications for 
£200,000 of Preference, and £100,000 of Ordinary Share Capital, 
the whole of which is subscribed and allotted. Subsequently, the 
company obtains the certificate entitling it to commence business. 

Prior to incorporation, an agreement has been entered into 
between the vendors and a trustee for the proposed company. 
The contract provides inter alia that the vendors agree to sell their 
business as a going concern on the basis of the Balance Sheet as 
at 30th June, 1917, for the amount of £900,000, to be satisfied as 
follows — 



Cash 

Preference Shares 

Ordinary Shares 



I 
200,000 
300,000 
400,000 

900,000 



with the addition of interest at the rate of 6 per cent, per annum 
from 30th June, 1917, to the date of settlement by the company 
of the consideration under the contract. 



144 ACCOUNTING 

The benefit of the contract s adopted by the company on the 
16th February, 1918, and the consideration duly discharged on 
that date. 

The Balance Sheet as at 30th June, 1917, does not form a correct 
basis "or opening the books of the company, for the latter, although 
it acquires the business as from that date, was not directly engaged 
in trading prior to incorporation, and is only able to earn divisible 
profits as from 1st January, 1918. 

It is sometimes suggested that a limited company is not able to 
earn divisible profits until it is itself actually entitled to commence 
business, but it is submitted that where the contract provides that 
the vendors shall carry on the business until it is duly transferred 
to the company and that, as and from the company's incorporation, 
they shall do so as agents for and on behalf of the company, this 
view is inaccurate. A limited company may not have an agent 
prior to incorporation, for until that time it has no existence, but 
it may do so subsequently, and it is no objection that such agency 
is consti uted by ratification. Thus the company, by adopting 
an agreement already entered into between the vendors and a 
trustee for the company ratifies the agency of the vendors as therein 
set out and in these circumstances earns profits available for division 
amongst its shareholders as from the date of its incorporation. 

Assuming that the facts on which this reasoning is based apply 
in the present instance, it will be correct to regard the profits earned 
on and after 1st January, 1918, as divisible, and to open the books 
as on that date. 

In regard to the contract of sale and purchase generally, the 
company, upon the adoption of the agreement, is in the position 
of having paid or otherwise satisfied a consideration of the total 
amount of £900,000. It has given this consideration for the busi- 
ness as a whole, but is not for that reason bound to accept the 
values of assets as they appear in the books of the vendor or to 
adopt them as a basis for opening the company's books of account, 
for they may be inaccurate. The Directors, therefore, may revise 
and, where necessary, correct them, provided that such adjustments 
as are made are in every respect fair and reasonable. It may, for 
instance, be the case that the asset of Plant and Machinery has been 
over-depreciated; or, on the other, that the value of Leasehold 
Property is at too high a figure, and in these and other respects the 



COMPANY ACCOUNTS 



145 



balances appearing in the books of the vendors may not form an 
accurate basis for the opening entries. 

With due regard to such revisions, if any, as are acquired, the 
following Balance Sheet as at 1st January, 1918, is prepared — 





BALANCE 


SHEET.- 


-1st January, 1918. 




Liabilities. 

Sundry Creditors . 

Vendors — 

Purchase price 
Accrued interes . 


£900,000 
27,000 


20,500 
917,000 


Assets. 

Freehold Land and Buildings . 
Leasehold „ „ . . 
Fixed Plant and Machinery . 
Loose Tools .... 
Stock-in-trade, at cost . 
Sundry Debtors . . 202,000 
Less — Reserve for Bad 

and Doubtful Debts . 5,000 

Cash and Bank .... 

Goodwill . . . 198,250 
Interest due to Vendors . 27,000 


C 

185,000 
65,000 

110,000 
18,500 

122,500 

197,000 
14,250 


Less — withdrawn since 
30th June, 1917 . 


927,000 
10,000 






' 


712,250 
225,250 








937,500 


937,500 



The transactions relating to the adoption of the Vendor's Agree- 
ment and the satisfaction of the consideration thereunder are 
expressed in the following Journal entries — 

1918. 
Jan. 



Sundries — 

To Purchase of Business A/c , 
For sundry assets acquired — 
Freehold Land and Buildings , 
Leasehold do. 

Plant and Machinery 
Loose Tools . 
Stock-in-Trade 
Sundry Debtors 
Cash and Bank 

Purchase of Business A/c 

To Sundries. 
For liabilities, etc., taken 
Sundry Creditors . 
Reserve for Bad Debts . 



Dr. 



Dr. 



Dr. 



Purchase of Business A/c 

To Vendors . . . . . 

For consideration due under £ 

Agreement . . . 900,000 

Interest thereon @ 6 % p. a. 

from 30th June, 1917, to date 27,000 



Vendors ..... 

To Purchase of Business A/c 
For amount withdrawn by them 

account of interest payable. 



Dr. 



185,000 
65,000 

110,000 
18,500 

122,500 

202,000 
14,250 

25,500 



927,000 



10.000 



£ 
717,250 



20,500 
5.000 



927,000 



10,000 



146 



ACCOUNTING 



1918. 
Feb. 16 



Interest A/c ..... Dr. 

To Vendors . . . . . 

For interest @ 6 % p. a. from 1st Jan., 

1918, to date, on ^900,000. 

Vendors ..... Dr. 

To Sundries — 
For shares allotted in part satisfaction of 

consideration: 
Preference Share Capital, 300,000 shares 

of £1 each . . . . . 

Ordinary Share Capital, 400,000 shares of 

£1 each ...... 



£ 

6,954 



700,000 



£ 
6.954 



300,000 
400.000 



Note. — The balance due to the Vendors is discharged by the payment of 
cash, for which an entry will appear in the Company's Cash Book. 



PURCHASE OF BUSINESS ACCOUNT. 



1918. 
Jan. 1 


To Sundries 
„ Vendors 

To Balance.brought down . 


£ 

25,500 
927,000 


1918. 
Jan. 1 


By Sundry Assets 
„ Vendors 
„ Balance carried down 


£ 

717,250 

10,000 

225,250 




952,500 
225,250 


952,500 


1918. 
Jan. 1 





VENDORS. 



1918. 
Jan. 1 
Feb. 16 



ro Purchase of Business A/c 

„"' Sundries 

,,-Xash . . . . 



£ 

10,000 

700,000 

223,954 



933,954 



1918. 
Jan. 1 
Feb. 16 



By Purchase of Business A/c 
„ Interest A/c . 



£ 

927,000 
6,954 



933,954 



Purchase of Business Account has been charged with interest 
upon the purchase price accrued up to the date of incorporation, 
vi^hile interest for the subsequent period has been debited to Interest 
Account. Distinction is made on the ground that the former 
amount is, so far as regards the company, a capital charge, while 
the latter affects Revenue. The company is entitled to treat as 
divisible all profits earned from the date of incorporation, and such 
outgoings in the nature of interest as are incurred since that date 
through delay in discharging a liability on capital account, are 
clearly chargeable against the company's Profit and Loss Account. 

The balance of Purchase of Business Account when finally 
ascertained may be transferred to Goodwill Account, 



COMPANY ACCOUNTS 147 

When a business is transferred to a limited company as a going 
concern, it frequently happens that no definite break is made to 
ascertain the exact amount earned up to the date when the company 
itself begins to earn divisible profits. 

The profits earned prior to incorporation are clearly not available 
for distribution amongst shareholders, for they have not been 
earned by the company; nor could they be said to have been earned 
by an agent of the company, for the company cannot have an agent 
at a time when it has no existence. If the company should acquire 
the benefit of such profits, it could only do so out of its capital, 
and in exchange for some consideration, usually that specified in 
the sale agreement. Such profits must not, therefore, be treated 
as divisible, but be placed either to reserve, or used to write down 
the balance of Purchase of Business, or Goodwill, Account. 

When the financial position is not definitely ascertained at the 
date of incorporation, and consequently the amount of the profits 
to that date is not precisely calculated, the Profit and Loss Account, 
when prepared, will relate to a period partly prior, and partly sub- 
sequent, to incorporation. In these circumstances, an apportion- 
ment is necessary to arrive at the proportionate part of the profits 
to be reserved. For this purpose, care must be taken to divide 
the various items of gain and loss in the exact proportions attri- 
butable to the respective periods. Directors' Fees, for example, 
re- ate entirely to the period of the company's trading, while the 
amount of a management salary paid to the vendors up to the 
time of transfer will probably be found to relate mainly to the 
earlier period. 

Problem. — The A B Company, Ltd., acquires a business as 
from 30th June, 1918, on the basis of the Balance Sheet as at that 
date, for an agreed sum. The company is incorporated on 7th 
February, 1919, and on 18th March, 1919, duly adopts the contract 
made prior to incorporation between the vendors and a trustee 
[or the (proposed) company. This provides that the vendors shall 
carry on the business until transfer, receiving therefore a salary at 
the rate of £500 per annum from 30th June, 1918, to date of transfer, 
and that in carrying on they shall as and from the date of incorpora- 
tion do so as agents for the company, thus placing the company in 
the position of earning divisible profits from that date. The 
accounts are not made up on 7th February, 1919, and the nejct 



148 



ACCOUNTING 



Balance Sheet is that prepared as at 30th June, 1919. The Profit 
and Loss Account then submitted appears as follows — 





TRADING AND PROFIT 


AND 


LOSS ACCOUNTS 




For the 


Year Ending 30th June, 1919. 




1918. 




i 


1919. 




i 


June 30 


To stock on hand 


15,040 


June 30 


By Sales .... 


120,000 


1919. 








„ Stock on hand 


16,380 


June 30 


„ Consumption of Raw 

Materials 
„ Wages .... 
„ Manufacturing Expenses . 
„ Balance carried down, 

gross profit, being 30 % 

on Sales 


22,365 

61,555 

1,420 

36,000 










136,380 


136,380 















1919. 
June 30 



To General Establishment 
and Trade Charges 

„ Management Salary to 
Vendors 

„ Debenture Interest (pro- 
portion accrued) . 

„ Directors' Fees 

„ Balance carried down 



22,700 

353 

150 

250 

12.547 



1919, 
June 30 



1919. 
Mar. 31 



By Balance brought down 



By Balance brought down 



i 
36,000 



36,000 



12,547 



Apportionment is required of the final balance of £12,547 as 
between the two periods, 30th June, 1918, to 7th February, 1919, 
and 7th February, 1919, to 30th June, 1919, respectively. 

In regard to the gross profit, in the absence of stock-taking, 
probably the most accurate basis of apportionment in the case of 
a manufacturing business is upon the sales of the respective periods, 
but there are, of course, many businesses in which the ratio of gross 
profit on turnover varies greatly from time to time, and more 
exact methods may be necessary. The same basis would apply 
to the General Establishment and Trade Charges, but the remaining 
items would require accurate division according to the factors 
bearing thereon. 

STATEMENT OF APPORTIONMENT OF PROFIT. 



1st 
Period. 



2nd 
Period. 



1st 
Period. 



2nd 
Period. 



General, etc., charges 
Salary to Vendors . 
Debenture Interest 
Directors' Fees 
Balance 



i 
13,620 
300 



8,580 



53 

150 

250 

3.967 



Gross profit . 

(Sales £75,000 and 
£45,000) . 



22,500 



i 
13,500 



22,500 



13,500 



13,500 



COMPANY ACCOUNTS 149 

From the statement given, it appears that the divisible profits 
are £3,967, while the amount to be carried to reserve is £8,580. 

The example set out excludes from consideration exceptional items 
of expense, such, for instance, as special advertising, extraordinary 
repairs, etc. In such cases, consideration must be given to the 
nature of the outlay, and endeavour made to apportion them fairly. 
In any case, however, an apportionment made in this manner 
can only be approximate. It is undoubtedly preferable that a 
Balance Sheet and Profit and Loss Account be prepared at the 
proper date where possible. 

Underwriting. 

An issue of share capital or debentures by a limited company 
is frequently underwritten. 

The forms of underwriting agreements vary, but invariably 
contain a definite undertaking on the part of each underwriter to 
subscribe and pay for a stated amount of the issue, failing applica- 
tion by the public therefor, and a provision for the payment by the 
company of a remuneration by way of commission, proportionate 
to the obligations contingently assumed. 

The liabilities of underwriters are in proportion to the risk. In 
measuring their liability, regard must be had to the total issue, the 
total underwritten, and the total of applications received. Thus, 
upon an issue of 100,000 shares, of which 50,000 is underwritten, 
the underwriters are entitled to benefit by relief of their HabiHty 
to the extent of 50 per cent, of the applications, and are liable for 
50 per cent, of the deficiency. If, in such a case, applications were 
made and accepted for 55,000 shares, the underwriters would not 
be relieved, for there is a shortage of 45,000, of which 50 per cent, 
would fall on them. It may, of course, be a term of the under- 
writing contracts that no liability attaches thereunder unless the 
whole issue is underwritten. 

Underwriters frequently assist an issue by distribution of pros- 
pectuses, and by procuring subscriptions. They may be permitted, 
under the terms of their contracts, to have such applications as they 
procure applied in specific relief of their respective liabilities. Such 
applications, identified by a rubber stamp giving the underwriter's 
name, are then to be held distinct from general applications, that 
is, those applicable in relief of underwriters as a whole. 



150 ACCOUNTING 

All applications are addressed to the company, and the discretion 
of directors to accept or reject is as a rule not affected by any term 
of an underwriting contract. The company thus may accept 
applications, whether proceeding from a member of the general 
public or from a subscriber whoze appHcation will assist in relief 
of a particular underwriter, and an underwriter, otherwise liable, 
may find himself entirely relieved in this way, with, possibly, a 
surplus; the latter will benefit other underwriters. There may 
thus appear to be a liability falling upon underwriters in respect 
of general applications, which is reduced, or discharged, by 
applications attributable to them individually. 

The matter may be illustrated as follows — 

£ 

Total issue 100.000 

Applications from Public (general) .... 75,000 

Shortage falling on underwriters of ;^ 100,000 . . 25,000 

Underwriters are as follows — 

I 

A 5,000 

Applications (not included above) specifically 

in relief of A and induced by him . . 7,000 

B 2,500 

Do. do. do. do. 2,400 

C 2,500 

Do. do. do. do. 500 

Sundry 90,000 

100,000 

A's liability is ;^1,250, but he has procured applications for ;^7,000 
B's „ ;^625, „ „ „ „ ;^2,400 

C'S „ ;^625, „ „ „ „ ;^500 

Sundry „ ;£22,500, applications are . . . Nil. 

A is clear, \vith ;^5,750 surplus; 
B „ „ „ ;^1,775 

Both A and B are clear from liabiUty. 

The company, however, accepts the full amount of the applica- 
tions induced by A and B. Irrespective of those attributable to C, 
the applications accepted are — 

£ 
General applications . . . 75,000 

Applications induced by A . . 7,000 

„ B . . . 2,400 

84.400 



Company accounts 



151 



leaving a shortage of £15,600, falling on underwriters (excluding 
A and B) for £92.500. 

C's proportion of the deficiency as adjusted is ^%%% x £15,600, 
equal to £421 approximately. But C has induced applications 
(which are duly accepted) in respect of £500, and is therefore clear 
with £79 surplus. 

The applications are now to be reckoned as £84,900, and there 
is a consequent deficiency of £15,100, to be contributed by sundry 
underwriters in respect of £90,000. 



Forfeited Shares. 

Example. — The Directors of a Limited Company, acting in 
accordance with their powers contained in the Company's Articles 
of Association, forfeit 100 Ordinary Shares of £1 each, upon which 
7s. 6d. per share has been paid. The amounts due in respect of the 
first and second calls of 7s. 6d. and 5s. per share respectively are 
unpaid. 

Subsequently the shares are reissued to X, credited as 15s. paid 
up, for the sum of £62 10s. X duly pays the balance due of 5s. 
per share. 

The Journal entries relating to these transactions are as follows — 

Share Capital .... Dr. 

To Sundries — 

First Call A/c 

Second ,, ..... 

Forfeited Shares A/c .... 

Transfer to Forfeited Shares A/c of cash 
received from A in respect of 100 Ordinary 
shares oi £\ each, forfeited. 

Cash Dr. 

To Forfeited Shares A/c 

Cash received from X on reissue to him 
of 100 Ordinary shares oi £\ each, credited 
as 15s. paid up, previously forfeited. 

Note. — ^This entry would be posted from the Cash Book. 

Sundries — 

To Share Capital 
Second Call A/c . 
Forfeited Shares A/c 

For nominal value of shares forfeited, 
now reissued. 

Note. — The debit on Second Call Account will be cleared by a posting from 
the Cash Book of the amount of the call as and when received from X. 



£ 


s. 


d. 


i 


s. 


100 






37 
25 
37 


10 
10 


62 


10 


- 


62 


10 



Dr. 












. 








100 


_ 


• 


25 


_ 


— 






ted," 


75 











152 



ACCOUNTIXG 



Annual Return. 

Every limited company is bound, by section 26 of the Companies 
(Consolidation) Act, 1908, to make a return to the Registrar of 
Companies. The form and the particulars included therein are 
illustrated in a specimen return as shown on pages 163-167. 

Dividends. 

The entries consequent upon the declaration of a dividend 
ordinarily present few difficulties to the student, but where the 
dividend is in the form commonly termed a " share " or " bonus '* 
dividend, the treatment in accounts of the transactions relative 
thereto may be of interest. 

Example. — ^The following is the Balance Sheet (summarised) of 
the XYZ Manufacturing Company, Limited, as at 31st Dec. 
1918— 



Liabilities. 




Assets. 




Share Capital (Issued) — 


£ 


Sundry Assets, less lia- 


£ 


32,000 shares of £5 each. 




bilities 


185,300 


£2 10s. paid 


80,000 






Reserve 


95.000 






Profit and Loss A/c, 








balance to credit 


10.300 








185.300 


185,300 



The company declares a d'.vidend of the amount of £2 10s. per 
share, free of income tax, but at the same time empowers the direc- 
tors to call up a like amount, thus, in effect, paying the call out of 
the dividend declared. 

It is found necessary that the Articles of Association as existing 
be altered to permit of this procedure, and the following resolutions 
are passed and subsequently confirmed as special resolutions by the 
company in general meeting. 



RESOLUTIONS. 

1. That for the purpose solely and exclusively of carrying out Resolution 
No. 2, but not for the purpose of any further or other call. Article 31 of the 
Articles of Association be altered by striking out the words " No call shall 
exceed 20 % of the nominal amount of a share and," so that the Article as 
altered will read " At least two months shall intervene between the time 
appointed for payment for one call and that appointed for the payment of 
the next succeeding call (if any)." 



COMPANY ACCOUNTS 



153 



2. That the Directors be, and they are hereby, authorised after the above 
Resolution has been confirmed to make a call upon the shareholders to the 
amount of £1 10s. per share, being the balance remaining uncalled on each 
of 32,000 shares of the company, such call to be payable on the first day 
of August, 1919. 

3. That for the purpose of enabling the shareholders to meet such call, 
this meeting sanctions the distribution by way of bonus among the members 
of the company, of the sum of ;^80,000 free of income tax, and of the sum of 
;^95,000 now standing to the credit of the Reserve Fund in proportion to the 
shares held by them respectively, that is to say, a bonus at the rate of £1 10s. 
free of income tax on each of the 32,000 shares of the company, such bonus 
to be payable on the first day of August, 1919. 

4. That as from the 10th day of August, 1919, the Capital of the company 
be 160,000 shares of £\ each, by sub-dividing each of the existing shares of 
£i) each into 5 fully paid shares of ;^1 each, and that the shares be renumbered 
from 1 to 160,000. 



Upon mforming the shareholders of the declaration of the dividend 
and of the call due, the directors draw attention to a provision in 
the Articles of Association precluding participation in a dividend 
on the part of any shareholder while there remains due from him 
to the company any sum in respect of the shares held by him. 
The shareholder is thus prevented from demanding payment 
of the dividend while the call is unpaid. The notice to the share- 
holders further asks for authority to set off the dividend against 
the call. 

In regard to these transactions, the following Journal entries 
are necessary — 



Reserve ..... Dy. 

To Sundry Shareholders 

For dividend at rate of £2 10s. per 
share, free of income tax, on 32,000 shares. 



Call A/c . . . 

To Share Capital 
For call of £1 10s. per share. 



Dr. 



Dr. 



Sundry Shareholders 

To Call A/c . . . . . 

For amount of call due from sundry 
shareholders. 



£ 

80.000 



80,000 



80.000 



£ 
80.000 



80,000 



80,000 



Following the declaration of dividend and making of the call, 
the Share Capital will appear as £160,000, and the Reserve as 
£15,000. 

The subdivision of each £5 share into five shares of £1 each will 

11— (1377) 



154 



ACCOUNTING 



not involve any entries in the books of account. It will be neces- 
sary, however, that the existing Share Ledger be closed, and a fresh 
one opened, which can conveniently be done by means of a Share 
Conversion Journal. 









SHARE CONVERSION 


JOURNAL. 








Distinc 
of SI 


tive No. 
lares. 


Fo. in 

old 
Ledger. 


Name. 


Nominal 
holding. 


Fo. in 
new 


Distinctive Nos. 

of Shares held 

(as altered). 


From. 


To. 




From. To. 



















When a company issues additional capital at par or at a price 
less than the full market value of the existing shares, it frequently 
gives shareholders an option to subscribe to the new issue pro rata 
to their existing holdings. The shareholders individually may 
thus acquire rights of some value, which they may either secure to 
themselves by subscribing for the shares allotted to them upon the 
terms of issue, or sell (if so permitted by the terms of the issue) for 
valuable consideration. These alternatives do not affect the entries 
in the company's books of account, which are limited to the record 
of the transactions only in so far as the company itself is affected. 

Reduction of Capital. 

A company may seek to reduce its capital by means of a repay- 
ment to shareholders on the grounds that it has a greater capital 
than it can readily employ. Usually, however, a loss of capital is 
implied and the share capital issued and paid up is not represented 
by the value of the assets. 

There may be various reasons for this: unsuccessful trading, the 
giving of a consideration originally greater than the assets acquired, 
depreciation in capital value from external causes, such as war or 
legislation with an adverse tendency on a particular industry. The 
company may seek powers to reduce its capital accordingly, and 
thus cause the share capital to represent more accurately the value 
of the surplus of assets over liabilities. 



COMPANY ACCOUNTS 



155 



This procedure may be of real benefit to the company; possibly 
enabling it to raise further capital more freely thus improving 
its borrowing powers and credit; or resulting in the earning of 
greater profits, for these are burdened with depreciation of the 
assets at their reduced value only. 

A reduction of capital for reasons of the nature stated is usually 
accomplished by the sanction of a special resolution, confirmed by 
the approval of the High Court. 

The form and method of the reduction are determined by the 
circumstances, but it may be said generally, though not invariably, 
that any balance of undivided and accumulated profits must be 
used in the first instance to Uquidate the loss as far as possible. 

Example. — The following is the Balance Sheet as at 31st 
December, 1918, of the Blank Company, Ltd. — 



Liabilities. 


i 


Assets. 


i 


Share Capital (Issued) — 




Goodwill 


42,000 


20,000 Ordinary Shares 




Freehold Land and build- 




of ;^5 each 


100.000 


ings .... 


12.500 


Sundry Creditors 


23.000 


Plant and Machinery 


18.500 


Premium on Shares 


3.000 


Patents 


19.000 






Stock . . . . 


10.400 






Sundry Debtors 


8,000 






Cash and Bank 


600 


- 




Profit and Loss A/c 








balance to debit 


15.000 




126,000 


126,000 



A reduction of capital is duly sanctioned by special resolution 
of the company, and confirmed by the Court, to the extent of 
£43,000, in respect of the following — 



Goodwill . 
Patents . 
Profit and Loss 
Total 



i 
16,500 
11,500 
15.000 



;^43.000 



which is declared to be apportionable as follows — 

By eliminating Premium on Shares A/c 
By reduction of Share Capital, upon terms of making 
each share of £^ each a fully paid share of i^ Os. Od. 



i 
3,000 

40.000 

43.000 



156 



ACCOUNTING 



i 
43,000 



40,000 
3,000 



16,500 
11,500 
15,000 



43,000 



The necessary Journal entries are as follows- 



Redttction of Capital A/c . . Dr. 

To Sundries — 
Goodwill ...... 

Patents ...... 

Profit and Loss A/c . . . . 

For reduction in respect of balances 
stated, under terms of Order of Court. 

Sundries — Dr. 

To Reduction of Capital A/c 
Share Capital . . . . , 

Premium on Shares . . . . 

For apportionment of loss of capital, in 
accordance with Order of Court, Share 
Capital being now ;^60,000, divided into 
20,000 shares of £3 each, full}^ paid. 



Absorptions and Amalgamations. 

The absorption by one company of the undertaking of another 
involves liquidation of the latter and satisfaction of the interests 
of its shareholders in manner agreed. This will frequently involve 
allotment of shares in the continuing company as fully or partly 
paid up. 

In certain circumstances, where the element of goodwill is an 
important factor and its retention at full value essential, it may be 
thought that this would be affected by liquidation. A method 
that might then be adopted would be for the absorbing company 
to acquire a substantial proportion of the share-holdings in the com- 
pany '* absorbed," thus retaining it as a legal entity, and securing 
the value of its earning powers, organisation, and undertaking 
generally. 

The entries which follow are designed to illustrate the transactions 
involved by an absorption or amalgamation as they would appear 
in the books of account of both companies. 

Example. — The " A " Company, Ltd., acquires the business 
of the *' B " Company, Ltd., assuming the whole of its liabilities 
and assets, including goodwill, but excluding from the assets such 
part thereof as may be found to be required to satisfy costs of 
liquidation and dissentient shareholders. The terms involve the 
allotment to " B " shareholders of one share of £20, £5 paid, in 
the " A " Company for every two shares in " B " Company. 

The following Balance Sheet, dated 31st Dec, 1918, shows the 



COMPANY ACCOUNTS 



157 



position of " B " Company, Ltd. 
the contract has been made. 



and forms the basis upon which 



Liabilities. 
Share Capital (Issued) — 

200,000 shares of ;^10 

each, £3 paid 
Reserve Fund 
Sundry Creditors 122,500 
Bills Payable 143,500 



Profit and Loss A/c 
balance to credit. 



600.000 
480,000 



266,000 
43,000 



1,389.000 



Assets. 

Freehold Land and 
Buildings . 

Plant and Machinery, 
less depreciation 

Stock-in-Trade 

Sundry Debtors 589,000 

Less Reserve for 
Bad and Doubt- 
ful Debts . 9,000 



Parr's Bank, Ltd. 7,750 
Cash in hand 1,250 



£ 

342.000 

183,000 
275,000 



580,000 
9,000 



,389,000 



It appears, upon the Hquidation of " B " Co., Ltd., that certain 
shareholders, holding 160 shares, give notice in due form of their 
dissent from the special resolution of the company under the 
authority of which the sale is made and require the liquidator to 
purchase their interests. The value of the shares is ascertained by 
arbitration and fixed at £6 10s. per share. 

The amount reserved from the hquid assets transferred to meet 
the claims of dissenting shareholders and the costs of liquidation 
is £1,800. Subsequently, the actual cost in respect of both these 
matters is ascertained to be £1,560. 



Journal entries in the books of " B " Company, Ltd. — 



Sale of Business A/c . . . Dr. 


£ 
1,396,200 


£ 


To Sundries — 






Freehold Land and Buildings 




342.000 


Plant and Machinery .... 




183.000 


Stock-in-Trade 




275,000 


Sundry Debtors 




589,000 


Bank 




7.200 


Being assets transferred to " A " 






Company in accordance with Agreement 






dated .... 






Sundries — Dr. 






To Sale of Business A/c 




275,000 


Sundry Creditors ..... 


122.500 




Bills Payable 


143,500 





15S 



ACCOUNTING 



Reserve for Bad and Doubtful Debts Dr. 
Being liabilities and reserve transferred 
to " A " Company in accordance \vith 
agreement dated .... 

Sale of Business A/c . . . Dr. 

To Sundries — 
Liquidation and Arbitration Expenses, etc. 
Cash 

Being— £ 

Costs of liquidation and arbitration 520 
Amount paid to shareholders in 

respect of 160 shares . . 1,040 

Cash transferred to " A " Company 240 

1,800 

Share Capital . . . . Dr. 

To Sale of Business A/c 

For nominal paid-up value of 160 shares 
paid out by liquidator at price of £& 10s. 
per share, as fixed by arbitration. 

" A " Company, Ltd. . . . Dr. 

To Sale of Business A/c 

For nominal value of 99,920 shares of 
;^20 each, £5 paid, agreed to be allotted to 
holders of 199,840 shares in " B " Company, 
Ltd. 



Sundries — 

To Sundry Shareholders 
Share Capital . . . . 

Reserve Fund . . . . 

Profit and Loss A/c 

Transfer of sundry balances. 

Sundry Shareholders 

To Sale of Business A/c 
Transfer of balance of latter A/c. 



Dr. 



Dr. 



Dr. 



Sundry Shareholders 

To " A " Company, Ltd. 

For 99,920 shares of ;^20 each. £5 paid 
(market value, ;^12 10s.) allotted to share- 
holders of " B " Company, Ltd., in respect 
of 199,840 shares. 

Journal entries in the books of " A " Company, Ltd.- 

£ 



I 
9.000 



1 800 



480 



499.600 



599,520 

480,000 

43,000 

622.920 



499.600 



1.560 
240 



480 



499.600 



.122.520 



622.920 



499,600 



Sundries — Dr 

To " B " Company, Ltd., Purchase A/c 

Freehold Land and Buildings 

Plant and Machinery 

Stock-in-Trade 

Sundry Debtors 

Bank .... 

For assets acquired under agreement of 

purchase dated .... 



342.000 
183,000 
275,000 
589,000 
7,200 



I 
1,396,200 



COMPANY ACCOUNTS 



159 



" B " Company, Ltd., Purchase A/c Dr. j 
To Sundries — j 

Sundry Creditors . 

Bills Payable 

Reserve for Bad and Doubtful Debts 
For liabilities, etc., taken over. 

Cash Dr. 

To " B " Company, Ltd., Purchase A/c 
For balance of ;£ 1,800 retained by liquid- 
ator of " B " Company, after deducting 
costs (^520) and expenses of paying out 
dissentient holders of 160 shares at price 
of ;^6 10s. per share (;^ 1,040). 

" B " Company, Ltd., Purchase A/c Dr. 

To Sundry Shareholders of " B " 
Company, Ltd. . . . . 

For nominal value of 99,920 shares of 
;^20 each, £5 paid, due to be allotted in 
accordance with agreement of purchase. 

Svmdry Shareholders of " B " Company, 

Ltd Dr. 

To Share Capital . . . . 

For 99.920 shares of ;£20 each, £5 paid, 
allotted. 

" B " Company, Ltd., Purchase A/c Dr. 
To Capital Reserve . . . . 

For balance of former A/c transferred. 



275.000 



240 



499,600 



122,500 

143,500 

9,000 



240 



499,600 



621,840 



499.600 



499,600 



621,840 



Note. — In the books of " B " Company, Ltd., Sale of Business Account has 
been so dealt with as to show the result in respect of those shareholders whose 
interests are satisfied by an allotment of shares. The entries in the books of 
" A " Company, Ltd., have the effect of showing upon " B " Company, 
Purchase Account, the result of the transactions as a whole. 

In the foregoing entries, the value of the shares allotted has been 
taken as par, that is, at the amount treated as paid up in respect 
thereof, although this is less than the market value. The intro- 
duction of the latter in the entry relating to the shares is possible 
in the closing entries of the liquidating company, and may be thought 
to express more accurately the effect of the transactions, but such 
value can be at best only a memorandum and an approximate 
record, and it is submitted that it is preferable to deal only with 
the nominal paid-up value, while introducing a note of the current 
market price in the narration relating to the Journal entry. 

Reference was made to an alternative sometimes adopted, to 
secure the benefits of fusion without actual liquidation, by purchase 
from the shareholders of their interests. This, so far as the pur- 
chasing company's books are concerned, represents merely the 



160 



ACCOUNTING 



acquisition of an investment, while, so far as the other is affected, 
simply implies a change of shareholders. 

Reverting to the illustration, it will be observed that, in the 
books of " A " Company, Ltd., the Revenue for Bad and Doubtful 
Debts has been opened as a credit balance, thus leaving the total 
of Sundry Debtors to be posted to the debit of the Debtors' Ledger 
Adjustm.ent Account. The Reserve referred to has been made in 
respect of one of the assets acquired. It thus constitutes a capital 
reserve, and is not available for meeting losses in respect of bad 
debts arising otherwise than in respect of the specific balances of 
debts transferred. 

It is usual upon the transfer of a business that the debts should 
be guaranteed by the vendor to produce a certain minimum, and 
the liabilities not to exceed a stated maximum. It is important 
that the accounts relating to debtors and creditors should be so 
framed as to disclose whether any amount is eventually reccverable 
from the vender in respect of his guarantee. 

For this purpose, separate accounts should be opened in the 
General Ledger in respect of the Sundry Debtors acquired and 
Sundry Creditors balances taken over, and kept distinct from 
similar balances already existing or thereafter created. This 
differentiation is scmetim.es the more conveniently made, in that 
the Debtors' and Creditors' Ledgers of the vendor m.ay be continued 
until the balances are closed, by receipt of the amount owing, or 
discharge of the liability outstanding, but it is desirable, where this 
is the case, that the balances at the date of transfer should be 
clearly carried dovv^n, preferably in red ink. 

BOOK DEBTS (REALISATION) ACCOUNT. 





i 


5. 


d. 




i 


J.. 


To Purchase of Business 








By Cash . 


1,832 


— — 


A/c, book debts 








„ Reserve, for dis- 








taken over, gua- 








counts allowed . 


66 


_ 


_ 


ranteed to produce 








„ Do., transfer of 








;^ 1,850 net . 


2,133 

j 


3 


3 


balance 
„ Vendor, amount 
due under gua- 


217 


3 


3 










rantee 


18 


~ 


- 




2,133 


3 


3 


2,133 


^ 


3 



COMPANY ACCOUNTS 



161 



DEBTS REALISATION (BAD DEBTS AND DISCOUNTS) 
RESERVE ACCOUNT. 





i 


s.a. 




i 


s. 


d. 


To Book Debts (Realisa- 








By Purchase of Busi- \ 








tion) A/c (dis- 








ness A/c . 


283 


3 


3 


counts allowed) , 


66 


- 


- 


1 








„ Book Debts, trans- 
















fer of balance 


217 


3 


3 




j 






283 


3 


3 


283 3 


3 



Note. — The amount credited to Book Debts (Realisation) Account as the 
total of the sums received and of discount allowed in respect of debtors' 
balances taken over can be arrived at conveniently by the use of special 
columns in the Cash Book, by means of which monthly or other periodical 
totals may be obtained and posted. It is important that the amount entered 
at the debit of the account first given should be the gross total of the debtors' 
balances and thus be in agreement with the balances appearing in the vendor's 
Debtors' I-edgers. 



The rights of shareholders to participation in the assets upon 
liquidation are determined by the Memorandum and Articles of 
Association. In the absence of special provisions, the profit or 
loss appearing as the result of liquidation is to be distributed or 
borne proportionately to the nominal, as distinct from the paid-up, 
value of the share capital held by the members. 

Illustration. — The liquidator has in hand for distribution, 
after deducting all costs and expenses of liquidation, and after 
paying creditors in full, £5,208 6s. 8d. The Share Capital issued 
is as follows — 

Ordinary Shares: 10,000 of £1 each, 10s. paid; 
Preference „ 5,000 of £3 each, fully paid. 
There are no calls in arrear, or paid in advance. 

The method of distribution of the sum of £5,208 6s. 8d. in hand 
is to be such as will apportion the loss rateably to the nominal 
holdings of capital, and the basis of such division may be calculated 
by finding what ultimate loss will accrue to the shareholders should 
the whole of the uncalled capital be paid up. 

Thus: The uncalled capital is £5,000 in respect of the Ordinary 
Shares, which, if called up, would make the total assets £10,208 
6s. 8d. The distribution of this amount amongst the holders of 
£25,000 of fully-paid shares (£10,000 Ordinary and £15,000 Pre- 
ference) would represent a loss of approximately £14,800, equal to 



162 



ACCOUNTING 



lis. lOd. in the £. The distribution should be made in such 
manner as will apportion the loss accordingly. 

STATEMENT SHOWING DISTRIBUTION. 



Balance in hand, ajfter 
paying creditors and 
deducting costs and 
expenses . 

Call on Ordinary Shares, 
Is. lOd. per share on 
10,000 shares . 




Dividend on Prefer- 
ence Shares, £\ 4s. 
6d. per share on 
5,000 shares . 



6.125 



6.125 



Following the call of Is. lOd. per share in respect of the Ordinary 
Shares, and the distribution of a dividend upon the Preference 
Shares at the rate of £1 4s. 6d. per share, the ultimate loss will be 
found to be apportioned rateably to the nominal capital. Thus, 
the loss on each Ordinary £\ share is lis. lOd., and on each 
Preference £3 share is £1 15s. 6d. 

It should be observed that no distinction as to priority of payment 
exists as between the holders of Preference, and those of Ordinary, 
Shares, unless it is conferred by the terms of the company's Memo- 
randum and Articles of Association. It is, however, not unusual 
for such a distinction to be drawn in these documents, and their 
precise effect should be carefully ascertained in each case. 



Certificate No 157,329. 



Form No. 6A. 



THE COMPANIES ACTS, 1908 TO 1917. 



FORM E 
As required by Part II. of the Companies (Consoli- 
dation) Act, 1908 (Section 26), and the 
Companies (Particulars as to Directors) Act, 1917 



Oc 
Re 



A5s. 

Companies 

Registration 

Fee Stamp 

must be 

impressed 

here. 



Summary of Share Capital and Shares of. 



Blank Company Limited, made up 

to the....l2/A day ol.... September 19 ...19... (being the Fourteenth 

day after the date of the First Ordinary General Meeting in 19.... 19 ). 

Nominal Share Capital, £__50,000 

(__10,000 Ordinary __ {—Five 



Divided into* 



Shares of £" 



each. 



Total Number of Shares taken up* to tiie__12^;i__day oi_September__ i __50,000 

19_19 (which number must agree with the total shown in thej 

list, as held by existing nembers) . . . . . . ' 

Number of Shares issued subject to payment wholly in cash . . — 4,000 

Number of Shares issued as fully paid up otherwise than in cash . — 6,000 

Number of Shares issued as partly paid up to the extent of ) — None 

per share otherwise than in cash . . . • . • ' 
JThere has been called up on each of 4,000 Shares . . £ — 5 

" • : j 

,, ,, ,, ,, • • fc 

§Total amount of Calls received, including payments on application 
and allotment £__20,000 

Total amount (if any) agreed to be considered as paid on 6,000 — 1 

Shares which have been issued as fully paid up otherwise than>£ — 30,000 

in cash . . . . • . . . . . * 

Total amount (if any) agreed to be considered as paid on ) 

Shares which have been issued as partly paid up to the extent of > £ Nil 

per Share otherwise than in Cash . . . . * 

Total amount of Calls unpaid £ — Nil 

Total amount (if any) of sums paid by way of Commission in respect ) 

of Shares or Debentures or allowed by way of Discount since the h£ — 482 . 10 . 0_ 
date of last Summary . . . . . . . . * 



Summary 
Total amount (if any) paid on| 



Shares forfeited 



£-Nil 
l-Nil 
£~Nil 
£-Nil 
£-Nil 



__Nil 

£..Nil._. 



Total amount of Shares and Stock for which Share War- < Shares 
rants to bearer are outstanding .... * Stock . 

Total amount of Share Warrants to bearer issued ( Issued 
and surrendered respectively since date of last -j Surrendered 
Summary ....... t 

Number of Shares or amount of Stock com- < Number of Shares 
prised in each Share Warrant to bearer . I Amount of Stock 

Total amount of debt due from the Company in respect of all mort- 
gages and charges which are required (or, in the case of a Company 
registered in Scotland, which, if the Company had been regis- £ — 10,000 
tered in England, would be required) to be registered with the 
Registrar of Companies, or which would require registration if 
created after the first day of July, 1908 . 
NOTE. — Banking Companies must add a list of all their places of business. 
* Where there are Shares of different kinds or amounts (e.g., Preference and Ordinary, or £10 and £5) 

state the numbers and nominal values separately. 
X Where various amounts have been called, or there are Shares of different kinds, state them separately. 
§ Include what has been received on forfeited, as well as on existing, Shares. 
II State the aggregate number of Shares forfeited [if any). 

tS= The return must be signed, at the End, by the Manager or Secretary 
of the Company. 
Presented for filing by 



163 



'^^.-S O « g g. 

"^ - -, 8 



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I 



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Certificate to be given by a Private Company, Sec. 1 (3) Companies Act, 1913. 

I hereby certify that the Company has not since the date of its last Return issued 
any JnNitation to the public to subscribe for any shares or debentures of the Company. 
* Strike *I also certify that the MembersNof the Company, as shown by this Return, in excess 

out if the of the number of Fifty, are personsXwho are in the employment of the Company, and 
number persons who, having been formerly iii the employment of the Company, were while in 
does not such employment and have continuedXafter the determination of such employment to 
exceed 50. be Menibers of the Company. \ 



Signature Robert 



Johnson Officer. 

163 



.Secretary. 



List of Persons holding Shares in Blank 

twelfth day of September 19.. ..19.... , and of 

o[ the last Return, or (in the case of the first Return) of the 
and an Account of the Shares so held. 







NAMES, ADDRESS! 


:S, AND OCCUPATIONS. 




Folio 










in Register 










Ledger, 
containing 


Surname. 


Clu-istian Name. 


Address. 


Occupation. 


Particulars. 










1 


Bowes 


Alfred 


18 Leadenhall St., 
London, B.C. 


Merchant 


2 


Jones 


Alfred 


73 Brown St., 

Manchester 


Ironfounder 


3 


Maddox 


Henry 


15 Sunbourne Rd., 
Hampstead, 

London, N.W. 


Company 
promoter 


4 


Abraham 


Herbert 


15 Hester Hill, 
Croydon 


Gentleman 


5 


Eskrigge 


Mrs. Alice 


The Hut, 

Cheltenham 


Married 

woman 


6 


Roberts 


Charles 


18 Dacre St., 
Widnes 


Clerk 


7 


Shepherd 


Thomas 


White House, 

Liverpool Rd., 
Buxton 


Gentleman 


8 


Askew 


Ernest John 


15 Railway St., 
Kendal 


Contractor 


9 


Sharpies 


Marion 


38 Brown St., 

Manchester 


Secretary 


10 


Berry 


Revd. Otto 


Vicarage, 

St. Mary's Rd., 
Hotting Hill, 
London 


Vicar 


11 


Robinson 


Hugh Edward 


Shotwick, 

Cheshire 


Farmer 


12 


William 


Hugh Lloyd 


5 Prospect St., 
Putney, 

London, S.W. 


Builder 


13 


Martin 


Angela 


16 Elsivorthy Rd., 
Hampstead, 
London, N.W. 


Engineer 


14 


Jackson 


Alfred 


17 Liverpool Rd., 
Southport 


Gentleman 



166 



Company Limited, on the 

Persons who have held Shares therein at any time since the date 
incorporation of the Company showing their Names and Addresses, 





ACCOUNT OF SHARES. 




• Number of 

Shares held by 

existing Members 

at date of 


X Particulars of Shares 
Transferred since the date 
of the last Return or (in 
the case of the first Return) 
of the incorporation of the 
Company by persons who 
are still Members. 


X Particulars of Shares 
Transferred since the date 
of the last Return or (in 
the case of the first Return) 
of the incorporation of the 
Company by persons who 
have ceased to be Members. 


Remarks. 


Return.t 


Number, t 


Date of 
Registration 
of Transfer. 


N umber, t 


Date of 
Registration 
of Transfer. 




35.000 












7,500 












1,000 


500 


15th Oct., 
1919 






Transferred to 

H. L. Williams 


3,090 












100 












iOO 






250 


2nd August, 
1920 


Transferred to 

A. Martin 


1,400 












400 






100 


16th August, 
1920 


Transferred to 

A. Jackson 


350 












500 












250 












100 












50,000 





Signature (signed) Robert Johnson 

(State Manager or Secretary) Secretary . 



♦ The Aggregate Number of Shares held, and not the Distinctive Numbers, must be stated, and 
the column must be added up throughout so as to make one total to agree with that stated in the 
Summary to have been taken up. 

t When the Shares are of different classes these columns may be subdivided so that the number 
of each class held, or transferred may be shown separately. 

X The date of Registration of each Transfer should be given as well as the number of Shares 
transferred on each date. The Particulars should be placed opposite the name of the Transferor, 
and not opposite that of the Transferee, but the name of the Transferee may be inserted in the 
" ^""'"■^' " column, immediately opposite the particulars of each Transfer. 

167 



Remarks 



CHAPTER XV 

STATEMENT OF AFFAIRS AND DEFICIENCY ACCOUNT 

The preparation of a Statement of Affairs and Deficiency Account 
for the purpose of submission to creditors implies, as a general rule, 
insolvency, or, at least, inability to pay debts. Such preparation 
and submission may occur in the due and regular course of bank- 
ruptcy or liquidation proceedings, or be made voluntarily by a 
debtor with a view to some arrangement with his creditors. 

In regard to a limited company, it is usual for these statements 
to be prepared by or under the directions of the directors, and in 
compulsory liquidation this is obligatory. In bankruptcy, the duty 
of preparation rests upon the debtor, who is entitled to request 
assistance at the expense of the estate. Where the proceedings 
are in compulsory liquidation or bankruptcy, prescribed forms (set 
out hereafter) are required to be filled in. 

Failure to keep proper books of account is frequently one of the 
contributory causes of financial difficulties, and it may be the case 
that the statements in question have to be constructed from par- 
ticulars and information obtained by inquiry and examination of 
documents outside the books. In the case of a trader or person 
carrying on a business, it may be necessary as a preliminary that an 
accountant employed to assist the debtor should write up or com- 
plete the financial records. This may not be possible, for the 
information necessary in regard to past transactions may be lacking. 
The Statement of Affairs in these circumstances will be prepared 
from unpaid invoices produced, press or carbon copies of invoices 
for goods sold, and the general financial memoranda of the debtor, 
while the various headings of gains and losses to be entered in the 
Deficiency Account will be largely matters of estimate. 

The date of the Statement of Affairs is determined by the circum- 
stances. When it is submitted voluntarily, as, for example, by a 
debtor who has not had a receiving order made against him, he will 
ordinarily select the date, but where prepared for the purposes of 
proceedings in bankruptcy or compulsory liquidation, it will be 

168 



STATEMENT OF AFFAIRS AND DEFICIENCY ACCOUNT 169 

drawn up to show the position as at the date of the receiving or 
winding-up order, as the case may be. 

A person vested with the powers of an officer of the Court as 
trustee in bankruptcy or Hquidator may, by the exercise of his 
statutory powers, Hmit or reduce the claims of creditors or render 
available for them assets no longer under the control of the debtor, 
as, for example, in regard to a voluntary settlement or fraudulent 
preference. This possibility has no bearing on the Statement of 
Affairs, which is designed to show the actual position of the debtor 
as at its date. 

It may, for example, be obvious that a debtor has made what 
would, in bankruptcy, constitute a fraudulent preference. He has, 
however, parted with his assets to the extent of the amount paid 
away, which, therefore, no longer form any part of his assets. 
Moreover, a debtor against whom a receiving order has been made 
is not usually adjudicated a bankrupt until some time after the 
Statement of Affairs has been submitted, and until such adjudication 
has taken place — and it is by no means the case that adjudication 
invariably follows the making of a receiving order— there is no 
trustee in bankruptcy and no one legally constituted with authority 
to revise the acts of the debtor. The Statement of Affairs should 
deal strictly with the actual state of the debtor's affairs as they 
are at the date of the receiving order. 

An accountant employed to assist a debtor in bankruptcy pro- 
ceedings will frequently find information of value and assistance 
in an inspection (if permitted) of the preliminary examination by 
the Official Receiver. He may from this source become aware 
of property which the debtor has not disclosed to him, and of the 
general nature of special causes contributing to insolvency, such 
as losses from betting or speculation, and so receive assistance in 
the preparation of accurate schedules. 

In the succeeding pages, the schedules applicable to bankruptcy 
proceedings are submitted with particulars intended to show their 
general use. The notes given in explanation of the details entered 
do not appear on the prescribed forms. 



12— (1377) 






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On Accommodation 
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16 Venmore Street, 
Vancouver, B.C., 

Estate Agent 
15 Vauxhall Road, 

Liverpool, coal 

merchant 
The Haven, Maryport, 

gentleman 


"o 

a 

2: 


James Roberts 
Henry Tollemache 
Ernest Lloyd 


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182 



No. F. 46 L. 

Statement of Affairs. 



L. 



In Substitution for Such of the Sheets Named " A " to 
AS Will Have to be Returned Blank. 



List. 



Particulars, as per Front Sheet. 



Debtor's Remarks. 

Where no particulars are entered by the 
Debtor on any one or more of the Lists 
named " A " to " J " the word " Nil " 
should be inserted in this column 
opposite the particular List or Lists 
thus left blank. 



A. 

B. 

C. 

D. 

E. 

F. 

G. 

H. 

I. 

J. 



Unsecured Creditors . 



Creditors fully secured 



Creditors partly secured 



Liabilities of Debtor on Bills Dis- 
counted other than his own 
acceptances for value 

Contingent or other Liabilities . 



Creditors for Rent, etc., recover- 
able by Distress 



Preferential Creditors for Rates, 
Taxes, and Wages . 



Property 



Debts due to the Estate 



Bills of Exchange, Promissory 
Notes, etc., available as Assets 



Nil 



Nil 



Signature 

Dated 19 



It will be observed from the forms set out hereafter that the 
Statement of Affairs of a company in compulsory liquidation differs 
from that of an individual debtor, in that the former shows the 
deficiency (1) as regards creditors, and (2) as regards contributories. 
The full sets of forms should be carefully studied. 

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203 



CHAPTER XVI 

COST ACCOUNTS 

Under the title " Cost Accounts " are grouped all systems of 
accounting records that have as their object the presentation, in 
statistical or analysed form, of the cost of some particular service, 
process, product or department of a business. The preparation from 
records kept by double entry of the Profit and Loss Account 
furnishes a summary of the transactions of a business as a whole 
so far as they affect the earning of profit, and from this valuable 
statistical information is usually obtainable. Such information 
must necessarily, however, bear upon the past and be related to 
the entire business as a unit. By means of Cost Accounts, endeavour 
is made to separate the items of cost specifically attributable to 
each of the various operations of manufacture or trading to which 
the activities of those engaged in the business may be directed. 
Effective separation for successive periods of relative items of 
cost directly incurred upon similar operations must obviously 
provide material of great value to those in control, and from 
the information furnished and comparisons available, a more 
accurate view can be formed than would be possible from the 
ordinary form of Profit and Loss Account as to — 

(1) The outlay under each head of expenditure incurred in pro- 
ducing some manufactured article, or in rendering some service 
(not necessarily involving manufacture) in direct relation to the 
return for such outlay. 

(2) The improvement or otherwise in methods of manufacture, 
etc., so far as it can be interpreted by variations in the various 
elements of cost attributable thereto. 

The generalisations submitted may be made clearer by illustra- 
tion. Thus, a colliery proprietor may seek information as to the 
cost of raising a ton of coal, a match factory the cost of manu- 
facture of output measured in gross boxes of matches, and a 
builder the cost of executing a particular contract. The degree 
to which cost may be analysed is a matter of expediency, largely 
determined by the value of the results obtained for the effort and 

204 



COST ACCOUNTS 205 

expenditure incurred. It would, for example, be of no particular 
value to a colliery proprietor engaged in mining and selling coal of 
a uniform quality, to know the exact cost of each load of coal sold. 
He would be content to know the average cost of each ton of 
coal raised, in respect, say, of weekly periods, and the information 
furnished by the Weekly Cost Sheet, both actually and by com- 
parison with similar sheets, would ordinarily be sufficient to enable 
him to observe any appearance of greater or less economy of cost 
in relation to results, and would furnish him also, by reference to 
a record of current sales, with an indication of current profits. 
In such a case, the costs would be ascertained with reference 
to a unit assumed to be an average unit representative of the 
" product " as a whole; but this could be by no means always 
the case. An engineer, for example, might be engaged in 
execution of many quite dissimilar contracts, in respect of 
which no average unit, except possibly over a small field of his 
activities, could be taken, and in such circumstances the analysis 
of cost would require to be direct and specific, in relation to each 
contract. 

It is obvious that the precise lines of a system of Cost Accounts 
can be determined only by reference to the facts of each case. 
It may be said, however, that the form of any system will be 
governed largely by the question whether it is to be applied in 
reference to an average, or a specific, unit. 

Systems of Cost Accounts faU into certain general groups, which, 
it will be observed, are determined by the facts to which the system 
is to be appUed, thus — 

A. Single. — AppUed to a direct and simple process of produc- 
tion of an average standard unit of manufacture (e.g., a pair of 
boots). 

B. Multiple. — Applied to a system embracing a series of con- 
current records of the form described in A. where manufacture 
involves production of several standard articles, and the costs are 
based on an average standard unit of each. The manufacture of 
shells, fuses, etc., is a sound example of this system, for a factory 
might be employed in producing several types of shells, and while 
ascertainment of average cost of production would be sufficient, 
yet it is obvious that it should be the average cost of each type, 
and not of all types as a whole. 



206 ACCOUNTING 

C. Terminal. — Applied to contracts for performance of specific 
work according to specifications, such as the erection of a building, 
or the manufacture of engineering plant. In such cases each 
specific contract must be dealt with. 

D. Operating. — ^Applied mainly to concerns engaged in rendering 
services, or in the supply of commodities for reward, such as rail- 
ways, waterworks, etc., which, while not engaged in manufacture 
in the ordinary sense, none the less earn revenue. 

E. Process. — Applied to concerns engaged in chemical and 
similar industries, where by reason of the creation of by-products 
and the inter-relation of various processes, the ascertainment of 
direct cost in relation to the ultimate return is difficult. 

Note. — It will be obvious, on consideration, say, of the branch of industry 
concerned with the extraction of coal tar and the treatment of the various 
by-products resulting from the successive processes involved, that part of 
the return for the expense on one of the main processes in the earlier stages 
of the manufacturing operations is in the value of the by-products of that 
process, which themselves, however, when further treated, produce subsidiary 
by-products bringing a further return. The forms of cost accounts adapted 
to cases under this head involve the preparation of schedules of cost for each 
of the processes undertaken. Such schedules may furnish an analysis of 
cost of a product immediately saleable, or destined for a further process 
from which a finished and saleable product will result. To give a complete 
view of the comparative facts, the particulars of cost are supplemented by 
statistical details, designed to show, for example, weight or volume of product 
in relation to raw material consumed; loss in weight of raw material in process; 
coal consumption per unit of product; labour cost per unit of product, etc. 
Such forms of costs records are difficult and involve a knowledge of technical 
processes, and are subject to constant change and adaptation to variations 
in the methods and subject matter of production. 

It has already been stated that the basis of analysis of each 
section of Cost Accounts will be either an average or a specific 
unit, and in most cases this unit will be a unit of production; not 
necessarily so, however. Under section D of the classification 
given. Operating Costs, are included the working costs of tramways, 
railways, etc. Such concerns do not " produce " in the ordinary 
sense, but an analysis of cost is none the less desirable. This, in the 
case of tramways, might proceed on the basis of ascertaining, 
inter alia, cost per car mile, cost per unit of electrical power con- 
sumed, cost per passenger carried, average length of nominal 
journey per passenger, aveirage fare per passenger, with much 
other similar information and such subdivision as would give a 
thorough view of the working operations over each route of the 
system. It must not be thought that the particulars suggested 



COST ACCOUNTS 



207 



as desirable in relation to this or other illustrations given, comprise 
all the information that the system of costs in each case should 
provide. The subject is a wide one, and such instances are intro- 
duced merely to throw into greater prominence some point of 
general principle. 

COST SHEET OF COLLIERY. 



Week ending 19.. 

Saleable tons raised. 



Cost 



Wages: Underground — 

Hewers ..,..", 

Setters ...... 

Haulers ...... 

Checkers ...... 

etc. 
Wages: Above ground — 

Engine-room . . . . . 

Screeners ...... 

Joiners, Smiths, etc. . . . . 

etc. 

Total Wages and Average Cost . £ 
Pitwood ...... 

Royalty ...... 

Repairs ...... 

Motive power, including coal consumed 
Oil, stores, lamps, etc. 

Tools 

Depreciation of plant 

Amortization . . . . . 

Total direct cost . . . . j^ 

Oncost ...... 

Expenses of distribution and sale 
Establishment charges 
Expenses of administration. 



Total Cost and Average per ton £ 



Amount. 


Total. 


per ton. 





















Average selling price for period per ton. 

„ cost „ „ „ „ 

.. Profit . . . .. 



(Note. — It is assumed that the Colliery has one pit only.) 



208 ACCOUNTING 

Statement of Stocks. 

On hand at beginning of week 

On bank . 
„ rail 



Raised during week 
Less — 

Deliveries during week including 
supplies to Colliery 

On hand at end of week 

On bank . 
.. rail 



tons 



Statement of Orders. 

On hand at beginning of week 
Received during week . 

Less — 

Executed during week . 

On hand at end of week 



The basis to be adopted in any particular case for the purpose 
of analysing cost and of providing an effective comparison with 
similar operations of other periods can only be determined by a 
thorough examination of all the facts, and in applying the test of 
comparison, due allowance must be made for variable factors. 
The important item of labour cost, for example, may show con- 
siderable variation in relation to output, not only from increase 
or decrease in efficiency, but from alterations in rate of pay, by 
increase in rates, by increased proportion of overtime pay, etc., 
as well as the more general cause of changes in hours and conditions 
of work. Such matters, however, affect the interpretation rather 
than the construction of Cost Accounts. 

The more simple forms of Cost Accounts and particularly those 
indicated under the heading Single Costs (A) in the classification 
given, are largely self-explanatory of their purpose, and in general 
illustration of the objects in view in obtaining an effective analysis 
of the various items of productive cost, the example of a Colliery 
Cost Sheet is shown above. 

Before proceeding further in the consideration of any particular 
type of costs records, it will be well to consider, first, the theoretical 
classification of cost adopted in the construction of Cost Accounts, 
and second, the methods adopted to obtain the analysis required 
to show the specific cost of each complete operation. 



COST ACCOUNTS 209 

Cost is usually divided into Manufacturing Cost, or cost of pro- 
duction, and Oncost. The former is usually divided into Direct 
and Indirect Manufacturing Cost. The following classification 
gives a general indication of the nature of the charges under each 
head — 

Direct Manufacturing Cost. 

Materials and Production Stores. 
Productive labour. 

Indirect Manufacturing Cost (also termed Direct Oncost). 

Other labour, including superintendence, storekeeping, 

repairs, etc. 

Note. — Some of these may be distributed by book entry to accounts under 
the heads named to furnish a total of all expense under each, and the totals 
so arrived dealt with in the costs. 

Motive power, Hghting, heating and water. 
Repairs and maintenance. 
Shop stores. 

Factory Rent and Rates. 

Superintendence, including Factory Manager's and Foremen's 
Salaries. 

Workers' clothing. 
Mess-room expenses. 
Depreciation. 

General (or Indirect) Oncost. 

Expenses of distribution, sale, collection, establishment, 
administration and finance. 

The classification given indicates by its general arrangement 
the principles of separation of various classes of expense in respect 
of businesses not strictly to be termed manufacturing. 

The determination of particular items of cost in respect of a 
short period easily and promptly depends upon the operation of 
an accurate system of accounting. It is mainly in regard to items 
coming under the head of Direct Manufacturing Cost that special 
arrangements for analysis and ascertainment are desirable. Par- 
ticulars of materials used in production are obtainable from any 
efficient record of stores. In Chapter II the general lines of a 
satisfactory system are indicated. It remains to be considered, 
however, how these find expression in the Cost Accounts. A 



210 ACCOUNTING 

system of stores or stock records is usually built up from Receiving 
Notes or Goods Inwards Slips on the one hand, and Requisition 
Notes, Issue Warrants, or Delivery Orders, on the other. It is 
to the latter that the costs records should be related. 

At the end of each costing period, the issues to production 
recorded on the Stores Ledgers can easily be extracted and sum- 
marised. This summary may in some cases be an accurate state- 
ment of materials used in production, subject to proof of the 
accuracy of the Stores Ledger as a whole by periodical stocktaking. 
It may be, however, that adjustment is required in respect of 
materials on hand and unused, not in the stores, but in the depart- 
ments of the factory. Subject to this, the particulars of raw 
materials consumed as a whole can be ascertained in the manner 
indicated. Where the system of Cost Accounts in operation is not 
limited (as in the case of a colliery, for example) to a simple analysis 
of cost of one complete operation, the materials consumed require 
identification with reference to the particular operation in which 
they are used. This may present complications, but should not 
do so under any carefully considered system of requisitions for 
issues. The particulars given on each requisition should be 
arranged so as to show clearly the department and operation for 
which the goods are designed, and when this is thought to involve 
unnecessary or excessive clerical work, it is as a rule not difficult 
to devise a simple system of code numbers under which the par- 
ticulars of issues as recorded in the Ledger can be precisely referred 
to specific manufacturing operations or costing units. The abstract 
from the Stores Ledger of issues to production can then be made 
with all necessary subdivisions so as to provide a full and complete 
statement of materials consumed. 

It must not be assumed from the foregoing that materials issued 
necessarily form part of the Direct Cost, for a portion might con- 
ceivably be used upon capital expenditure or transferred to some 
other account of Direct or Indirect Oncost. Materials issued will 
be scheduled as a whole for the costing period, and classified 
according to the statistical division required. In the Cost Ledger 
hereafter referred to, Materials Account will be credited and the 
appropriate accounts debited to record the actual facts. 

As in the case of materials, the correct allocation of wages 
over the various manufacturing operations is a matter of great 



COST ACCOUNTS 211 

importance, and variations in practice are liable to cause 
considerable fluctuations in the comparative totals of Direct 
Cost. 

The general lines of a system for calculation and payment of wages 
have already been described. It remains to be considered how this 
expenditure may be analysed for distribution over the Cost Accounts. 
It is necessary for this purpose that a record be kept of the opera- 
tion on which each worker is engaged. So far as the form of record 
used for calculation of the pay roll lends itself, it will naturally 
be adapted to the further purposes of the costs. A considerable 
number of workers may be engaged on a simple routine operation 
involving as between them little or no variation in skill, and for 
the purpose of classification the total of the wages paid to such 
workers, as a whole, may be dealt with. This would apply, say, 
to a gang of bricklayers employed on a building job, and the 
Foreman's Wages Sheet would of itself furnish in total the figure 
of cost attributable to the particular work without further analysis. 
Similarly, the daily departmental wages sheets of a large factory 
might be designed so as to provide, for all, or at any rate, a large 
proportion of the workers, a classification of their earnings, accord- 
ing to their work, in such form that the analysis of the weekly pay 
roll is largely given therefrom. There must, however, be cases 
where the analysis requires detailed consideration of the work 
done by each employee, grouping them, of course, whenever possible, 
and this detailed analysis is by no means limited to the cases of 
workers paid by piece rates. 

In such cases, an Operation Card will be required for each 
worker, which will be made out with particulars of the worker's 
number, name, etc., and issued from the Time Office. Where the 
use of Collective Operation Cards is possible, these will be made 
out similarly. All such cards will go to the departmental foreman, 
overlooker, or chargehand, and will be filled in by him daily, with 
times of commencing and finishing work, hours worked, operations 
of worker, and any other material particulars, such as overtime, 
idle time, etc. These operation cards are made up independently 
to a large extent of the actual material for calculation of the pay 
roll, but form a valuable check upon it and must, individually 
and as a whole, agree with it, so that the total of the pay roll is 
accurately classified for statistical purposes. The analysis so 



212 



ACCOUNTING 



arrived at will be set out in schedule form, and form the basis of 
entries in the Cost Ledger. 

In regard to wages, to a greater extent than with materials, 
the classification may show many sub-headings not coming under 
the general head of Direct Cost, and, therefore, due to be charged 
as capital expenditure, or as affecting some subdivision of Oncost, 
the latter, of course, itself ultimately affecting the costs. 

The schedule now given shows the headings of a classification of 
labour consumed or expended in the operations of a shell-filling 
factory. 

ANALYSIS OF LABOUR COST. 



For weeks ending. 



Operating. 



Amount. 



Examining, Cleaning, and Painting- 

5 inch MK. II . 

6 „ .. V . 
6 „ „ VI . 
6 „ „ XI . 
6 „ „ XXII 

Filling gaines . 
Filling Fuses . 
Filling Primers 
Filling Q.F. Cartridge Cases 
Assembling Q.F. Ammunition 
Bonding and Packing 
Filling Igniters 
Etc.. etc. 



Total Productive Wages 



Total productive Wages (as above) 
Analysis — 

Oncost — direct 

indirect . 
a/c Army Ordnance Department 
Capital Expenditure 

Buildings .... 
Plant .... 



Total wages as per pay roll £ 



Direct Oncost includes all expenditure directly attributable to, 
or incurred by reason of, production, as distinguished from the 
general charges of administration and establishment. It is some- 
times taken as covering only those charges which, while not part 



COST ACCOUNTS 213 

of the direct cost, can be allocated to specific operations, but it is 
submitted that the term has a wider application and includes all 
expense attributable, even though only generally attributable, to 
production. 

The reason for distinction between Direct and Indirect Oncost 
is mainly that the general expenditure under the latter heading 
does not vary directly with production, while the former, although 
inclusive of some items of expense subject to no great variation, 
may be regarded as bearing a regular ratio to the costing unit. 
For example, a business doing a regular turnover of, say, £200,000 
per annum, may have general establishment charges in the form 
of office salaries, office rents, printing and stationery, travellers' 
salaries, interest, etc., of, say, £12,000. The turnover may be 
doubled without a corresponding increase in the total of Indii^ect 
Oncost. Manufacturing cost would, in total, increase; but, per 
unit, would remain roughly constant. It is, of course, the case 
that even Direct Oncost includes some charges such as factory 
rent and rates, and factory manager's salary, which might show 
no variation corresponding with the volume of work done, and an 
increase in turnover would thus operate in the general direction 
of reducing the burden per unit of Direct, as well as Indirect, 
Oncost. 

Direct and Indirect Oncost are usually summarised in schedule 
form, that for Direct Oncost (of which a pro forma example is 
given) being arranged to permit of direct allocations where deemed 
possible or advisable. It is frequently the case, however, that 
Oncost both Direct and Indirect, is dealt with in totals. 

The basis of allocation of Oncost not distributed by direct allo- 
cation is a matter for consideration upon the facts. Direct Oncost, 
not otherwise allocated, is sometimes apportioned over the various 
manufacturing operations in proportion to productive wages; in 
other cases the basis of the total of all direct manufacturing cost 
is considered more accurate. Indirect Oncost is usually dealt with 
as a whole and distributed in similar manner. It is desirable that 
the comparison of costs as between one period and another be 
rendered more effective by dealing separately with Direct and 
Indirect Oncost. An additional reason may exist for this where 
a trade is subject to periodical or seasonal demands. In such 
cases, it may be thought unsound to burden the production of 



Balance, 
being 
amount un- 
allocated. 








1 




1 
















1 


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o 




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214 



COST ACCOUNTS 215 

a slack period with the exact amount of Indirect Oncost incurred, 
and the principle followed may be that of estimating the probable 
output and Oncost of the full year and of charging the output of 
each costing period with a share of Oncost proportionate to the 
output on the assumption of the normal turnover estimated being 
attained. This, however, is a departure from the facts of actual 
expense incurred and is not to be recommended unless in very 
special circumstances. It must be admitted, however, that the 
calculation of Indirect Oncost involves estimates of current ex- 
penses in many instances, and constant revision is necessary to 
ensure the correctness of the total charge. 

The object aimed at in classifying the cost of production, namely, 
to ascertain total cost in direct relation to the costing unit, is 
probably clear in principle and the general lines of procedure have 
been indicated. It is obvious, however, that the Cost Accounts 
must be worked in conjunction with the general financial books 
to ensure that the former give an accurate view of cost actually 
incurred. 

For this purpose, a Cost Ledger is necessary, in which will be 
recorded in duplicate all entries in the financial books affecting 
the Manufacturing or Production Account. While the financial 
books will usually be closed at yearly or half-yearly periods, the 
Oncost Ledger will be written up and the Production Account 
constructed therein for each costing period. 

It is desirable to consider the use of the Cost Ledger in some 
detail. Consider, for example, the item of wages. This will be 
charged to Wages Account as paid and the debit on this account 
will be distributed at the end of each costing period according to 
the analysis thereof, the greater proportion of it naturally being 
debited ultimately to Production Account in the Cost Ledger, 
while some part may be debited to capital expenditure, or some 
general service charge such as repairs, motive power and the like. 
Production Account is thus duly charged with its proportion of 
wages. In respect of materials used, it has already been indicated 
how these are to be ascertained. In the Cost Ledger, Materials 
Account will show an opening balance of stock on hand, and all 
the purchases will be debited thereto. Issues to production will 
be valued and credited upon the account. Production Account 
being debited at the close of each costing period. Any other issues 



216 



ACCOUNTING 



for purposes of capital expenditure, or general service charges, will 
be similarly credited, and, provided the issues are properly ascer- 
tained and valued, Materials Account should represent in balance 
the value of materials on hand. 

In similar manner there will be raised in the Cost Ledger accounts 
for each section of Direct Oncost and for Oncost, with such sub- 
divisions, if any, as may be desired. Each of these accounts will 
be debited with the amounts affecting them and the sums credited 
will be those charged in the costs. 

At the conclusion of the financial period it should appear that all 
charges affecting the Manufacturing or Production Account have 
been charged to Production Account in the Cost Ledger. It may 
occur that, in respect of some items of expense, of which estimates 
are necessary, some excess or deficiency appears as between the 
actual expense and the estimates charged in the costs, and the 
Production Account in the Cost Ledger will require to be amended 
accordingly in a subsequent period. 

In all cases it is desirable that the Cost Accounts be reconciled 
with the financial books. It is not always expedient, however, to 
express them entirely in double entry form as a part of the general 
system of book-keeping. 

Terminal Costs of a Builder and Contractor, 

The pro forma accounts (submitted in outline) assume the use 
of a Cost or Contracts Ledger operated on principles of sectional 
balancing independently of the General Ledger. It is obvious, of 
course, that the accounts presented do not form a complete record 
of all transactions and are merely such as will indicate the principle 
features of the system adopted. 

GENERAL AND DEBTORS' LEDGERS. 



WAGES ACCOUNT. 



1920. 
Jan. 2 
9 
16 
etc. 


To Cash, Wages for week 


£ 
1,325 
1,437 
1,813 


1920. 
Dec.31 


By Cost Ledger A/c, transfer 


55,475 




55,475 




55,475 







COST ACCOUNTS 
MATERIALS ACCOUNT. 



217 



1920. 
Jan. 31 
Feb. 28 

Etc. 


To Sundries (per Purchases.J. 
To Stock on hand 


9,875 
3,864 

82,948 


1920. 
Dec. 31 


By Cost Ledger A/c, transfer 
„ Stock on hand 


£ 
62,836 
20,112 




82,948 


1920. 
Dec. 31 


20,112 





Similar accounts for Stores, Carriage, etc. 



COST LEDGER ACCOUNT. 



1919. 




£ 


1920. 




i 


Dec 31 


To Balance, Work in Pro- 




Dec. 31 


By Sundry Debtors, amts. 






gress at date 


128,416 




due on completed con- 




1920. 








tracts .... 


188,470 


Dec. 31 


„ Wages .... 


55,475 


„ 


„ Balance carried down . 


87.432 


>'>' 


„ Materials 

„ Stores . . . . 
„ Carriage 

„ Profit & Loss, profit on 
contracts to date . 


62,836 
9,463 
5,352 

14,360 










275,902 


275,902 


1920. 






Dec 31 


To Balance brought down. 
Work in progress . 


87,432 









J. JONES (COMPLETED CONTRACT). 



1920. 
Aug. 31 


To Cost Ledger A/c . 


4,720 


1920. 
Feb. 10 
Nov. 30 


By Cash . . . . 


i 
1,480 
3,240 




4,720 


4,720 



JAMES BROWN (UNCOMPLETED CONTRACT). 



I 1290. 
f Sept. 



3iBy Cash 



i 
9,000 



COST LEDGERS. 



CONTRACT "A.* 



1919. 






i 


1920. 




i 


Dec. 31 


To Balance at date 


, 


14,762 


Sept. 30 


By General Ledger, value of 




1920. 










work done . 


28,000 


Jan.- 


To Material 


, 


2,834 








Sept. 


„ Stores . 
„ Wages . 
„ Carriage 
„ General Ledger 
Profit . 


A/c 


1,320 

5,360 

245 

3,479 










28,000 


28,000 



15— (1377) 



218 



ACCOUNTING 



CONTRACT "B.* 



1920. 
Jan^ 
Dec. 


To Material 

„ Stores . . . . 
„ Wages . . . . 
„ Carriage 

„ General Ledger Account, 
Profit to date 

To Balance brought down . 


/so 

63 

1,235 

112 

110 


1920. 
Dec. 31 


By Balance carried down 


2,000 




2,000 


2,000 


1920. 
Dec. 31 


£ 
2,000 





WAGES ACCOUNT. 



1920. 
Dec. 31 



To General Ledger A/c, for 
Weekly Wages . 



55,475 



1920. 
Jan.- 
Dec. 



By Sundry Contracts, for 
Wages attributable 
thereto 



MATERIALS ACCOUNT. 



55,475 



1920. 
Dec. 31 



To General Ledger A/c 



1920. 
Jan.- 



By Sundry Contracts for 
Materials supplied 
thereto 



62,836 



1920. 




i 


1919. 




i 


Dec. 31 


To Sundry Contracts for 




Dec. 31 


By Balance, work in progress 






value of completed work 


188,470 




at date 


128,416 




„ Balance carried down 


87,432 


1920. 












Dec. 31 


By Wages .... 
„ Materials 

„ Stores .... 
„ Carriage 
„ Sundry Contracts, Profit 


55,475 

62,836 

9,463 

5,352 








1920. 


to date 


14,360 




275,902 


275,902 












Dec. 31 


By Balance brought down . 


87,432 



The pro forma accounts set out illustrate the main features of 
Terminal Costs, which are perhaps more easily expressed in the 
books of account than other costing systems. In the examples 
given, only cost directly attributable to a specific job is dealt with 
and the Cost Accounts proceed so far only as is needed to analyse 
the gross profit. It would be possible, though perhaps of no great 
value, to distribute over the accounts of the various contracts 
the Indirect Oncost. In the case of Terminal Costs, this is not 
always done, for the basis of apportionment is a matter of diffi- 
culty. If it be assumed that the total direct cost, wages, plus 
material, is the proper basis of charge, it will be necessary to 
ascertain the total Indirect Oncost of the financial period, for 
the costing period is different for each job ; this total must be 



COST ACCOUNTS 219 

estimated in advance, and, in addition, in order to allocate the 
charge to specific contracts, the estimated total of direct cost 
during the financial period must be taken. This of itself is com- 
plicated, and in practice may be found to involve the question of 
principle whether work in progress is to be valued at a figure 
inclusive of anything but the cost directly chargeable thereto, 
plus the limited amount of Direct Oncost arising in such cases. 
For these reasons systems of Terminal Costs frequently do not 
deal with Indirect Oncost. 

In cases of small jobbing work, such as that of an engineering 
pattern shop, or a plumber and decorator, the method of costing 
is, in some cases, rough and ready. As with all systems of costs, 
an exact allocation of direct cost of labour and materials is neces- 
sary. Upon the total so arrived at, an addition of a fixed per- 
centage may then be made for Direct Oncost, and the total of the 
supposed manufacturing cost is thus given. Upon this latter 
figure, a further percentage addition is made, and the full cost 
obtained. Thus — 

£ 5. d. 
Labour . . . 15 - - 

Materials . . . 8 - - 



23 - - Direct cost 
Add: 20% . . 4 12 - „ Oncost 



27 12 - 
Add: 15 % . . 4 2 9 Indirect oncost 



;^31 14 9 Total cost (estimated) 



It is clear that the estimates made in the manner shown must be 
at best an approximation to the facts, in addition to which the 
organisation and staff available in the businesses where the system 
of costing follows these lines are frequently far from perfect. It 
may be found that no attempt whatever is made in such cases to 
test the principles on which the costing system is founded, by a 
comparison of the cost records with the books, and their value is 
limited in consequence. 

Machine Costs. 

A system of Cost Accounts necessarily implies an analysis of 
cost with reference to some stated unit. It is not essential that 



220 ACCOUNTING 

the unit should be one of production, but merely that the analysis 
furnished should be in such form as will, by the aid of comparisons 
it affords with similar past records, guide a manufacturer in the 
development of his business upon scientific lines. 

In the chapter entitled Departmental Accounts, an illustration 
was submitted to show the application of the general theory therein 
described to a department which did not of itself earn revenue, 
but rendered services, and thus saved expense, to the business of 
which it formed part. In similar manner, it may be sought in a 
system of Cost Accounts to determine the cost of a process, or 
particular section of a business. Thus, in regard to the charge 
for motive power in connection with a manufacturing concern, 
the total expenses of this nature may be grouped for the purposes 
of the cost records, and the full outlay under this heading ascer- 
tained. The total so arrived at may be distributed over the 
various departments in proportion to their use of motive power, 
and where distinct departmental cost records are kept, the amount 
of this particular item of cost would be thereby determined in 
relation to each department. 

On similar principles, accounts may be constructed 'to show the 
cost of maintenance and use of a machine required to perform some 
particular operation, thus furnishing the basis of an estimate of 
the cost for each operation performed by it. It is obvious that the 
installation of machinery can only prove economical where the 
services which it can render are sufficiently in request to reduce the 
cost per use or operation below the price formerly incurred or paid 
for that particular purpose. 

The following schedule is submitted in illustration — 

Machine 

Schedule of Cost for period 



Materials 

Mechanic's Wages 

General Wages 

Oil and Stores 

Depreciation . 

Repairs 

Factory charges (propn.) 

Oncost charges ( do. ) 

Interest on Capital 



i ^- d. 



Total 



COST ACCOUNTS 



221 



The advantages of a schedule of this kind may be illustrated 
by example. The installation of the machine, apart from its use, 
involves a certain expense, say, £100, for Interest on Capital, On- 
cost, Rent, Rates, etc., and factory charges, which may be termed 
the fixed charge of the machine. Its use for its particular purpose 
necessitates a further outlay under the remaining headings given, 
which may be called the Direct Charge. It is obvious that the 
more frequent the use of the machine, the less will be the propor- 
tion of the fixed charge attributable to each operation. It is of 
importance that the manufacturer should know the average cost 
per use of the machine, for it may even be the case that from lack 
of work with which to feed it, the average cost per operation may 
be greater than would have had to be paid for the performance of 
the work by others or in some other way. The machine, in fact, 
brings profit or loss to its owner, and the system of Machine Costs 
is designed to show its amount. 

Occasionally it is found possible to ascertain the price payable 
for similar work, if performed elsewhere, and a record can then 
be kept of what may be termed the selling value of the work done 
by the machine, and this amount can be viewed in relation to the 
total cost. 

The illustration of Machine Costs suggests that Cost Accounts 
may be applied to departments of manufacturing operations 
regarded as units. Of this, the example now given, that of a paint 
manufacturer, is a development. In this case, the unit taken is 
the " mixing " or " mash," and all materials, labour, and other 
expense attributable thereto is allocated accordingly. 



Date Lot No. 





Weight. 


Rate. 


Value. 








Lbs. 




/ 


s. 


d. 


Chemicals 




• [ 


6,000 




182 


_ 


_ 


Water . 








4 


15 


_ 


Direct Wages 










12 


- 


- 


Indirect Wages 










2 


10 


- 


Oncost . 


Total . 








8 


15 


- 


- 


6.000 


210 


-1 - 



Product: Standard blue, 560 lbs, 
Cost: 7s, 6d. per lb, 



222 ACCOUNTING 

From the matter set out, it will be obvious that the form in 
which the analysis of cost is made varies according to circumstances, 
and is in some cases to be ascertained only by approximation. 
In the example now given, which refers to the cutting from tanned 
leather of " half -soles " for Army boots, the difficulty is to deter- 
mine the true distribution of cost over the " cutting." The raw 
material to be dealt with in this case is only partly suitable for the 
main purpose, and each " bend " of leather has to be used to the 
best advantage. Comparative cuttings of " bends " of similar 
quality by different cutters will show that some are of greater 
efficiency than others in obtaining a high percentage of the raw 
material in a state fit for the manufacture of the product of greatest 
value, namely, standard " Army half-soles "; the balance of 
leather being adapted to uses of minor value. The product of 
each " bend " as a whole represents a certain first cost, and this 
is spread over the product according to the cutting, in certain 
relative values of the cut leather. 

The first sheet shows weight of leather cut and its cost; the 
second shows the manner in which it has been cut and the cutting 
valued (disclosing that the cut leather is introduced into the final 
summary of costs at a price slightly less than its actual cost); the 
third sheet is self-explanatory; while on the last sheet the whole 
cost is summarised. 

It will be observed that the record of the transfer of materials 
from stock to production is necessarily limited, so far as the Stores 
Ledger Accounts are concerned, to the particulars of leather used 
as given on Sheet 1, but that, for the purposes of the costs, the use 
of the material has to be classified, valued, and allocated in the 
manner shown. 

There are also many minor tests of value; for example, the 
quaUty of cutting shown by each cutter, as determined by per- 
centages of weight of each class of material, and waste; the 
comparative costs of labour on cutting and other operations; and 
others. 

The system now illustrated has limitations, for it is clearly a 
matter of some difficulty to determine the correct valuation of 
output, as in Sheet 2. It will be found, however, by experience 
what is a fair basis of distribution of cost, which will, within a 
narrow margin of error, account for the whole. It may appear 



COST ACCOUNTS 



223 



Sheet A 
Statement of Cost for One week ending.... 24^/j Oct., 1918.... 

GOODS RECEIVED 



Weight. Date Reed. 



23,177 

296 

302 

1,792 

1,516 

303 

2,084 



29,470 
18,453 



1,017 
lbs. 



Oct. 



I9th 



2\st 



22nd 



From whom Purchased. 



On hand beginning of 
5^ period . . 

Received during period 



Stock on hand at end of 

period 
Leather used during 

period 



Less 2^ % discount 



Add, carriage out . 

Sacks, String, etc. 
72 at 1/3 
Rejections from inspection 



Total cost of 11,017 lbs. 
Average cost per lb. 3/4 



Price 
per lb, 



Details. 



296 
242 



45 
325 



10 



Total. 



3,946 



102 



539 



371 



4,959 
3.087 



1,872 



46 



,825 



.834 



18 



12 



16 



10 



19 



11 



10 



224 
Sheet B 

For 



ACCOUNTING 



DETAILS OF PRODUCTION 

One week ending 2Uh Oct., 1918. 



Prs. 

9,121 
6,156 
9,254 
3,842 



Army J-Soles . per lb. 4/5 

Lifts . . „ 3/- 

Tipfillers . „ 3/3 

Rejrjct i-Soles „ 3/- 

„ Lifts 

„ Tipfillers . 

Civilian— 3/- 

Value of Ranges) 

Offal . . > ' 

Waste . , . i , 



Weight 
lbs. 



5,035 
864 
631 

1,864 



904 
1,122 
1.033 



Price, 
per pr. 



2/5 

5 

2i 
1/10 



1/- 



Amount. 



129 
102 



Total. 



Ill 



232 
279 



135 
56 



11,453 
Deduct increase of Wet weight 436 



Cutting weight 11,017 
Cost . 



. £1,834 : 19 : 7 
gutting Value £1,815 ; 6 ; 8 



1,815 6 8 



For. 



COST ACCOUNTS 

DETAILS OF COST 

One week ending 24th Oct., 1918. 



225 

Sheet C 







Details. 


Total. 






Labour— 


























Foreman .... 


3 


- 


- 




















Piece Workers .... 


























Time Workers 


26 


12 


4 


29 


12 


4 














Direct Oncost (estimated) — 


























Repairs and Renewals 




18 


3 




















Depreciation .... 


3 


2 


9 




















Power, Light, and Heat . 


2 


2 


^ 




















Health Insurance .... 




5 


4 


6 


8 


4 














Indirect Oncost — 


























Rent } 

Rates 


3 


' 


6 




















Management 


12 


- 


- 




















Office Salaries and Accountancy 


4 


10 


- 




















Insurance, Fire and Em 

Liability 
Travelling 


ployer's 




7 


- 




















Office Expenses 




1 


_ 


- 




















Telephone, Stationery 






17 


4 




















Postages 




























Hire of Machinery . 




























General Provision . 




2 


- 


- 




















. 




" 


" 


24 


^ 


10 






















60 


2 


6 






1 






















-B* 






1 









8 

SI 



to 






^ 





•ti - 








































-w fl 






















•s»- 








































fiis 






















a 




















' 






'i* 


W5 


t^ 








1 




i 

o 






e^ 


t^ 
















CO 


to 


C<I 


o 








1 




(N 






-^ 








i 






















^ 


^ 




















H 


























CO 


r-l 


1 


r-l 




_i 


1 


c^ 


■ 




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r^ 




1—1 






05 


N 


■* 


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05 






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o 


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05 




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■"* 














■"* 








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(B). 




















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terials 
(A). 


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32^ 



COST ACCOUNTS 227 

at times that the adoption of a regular basis of valuation discloses, 
upon Sheet 2, that the whole of the cost is not spread over pro- 
duction. This would necessitate revision of the basis of allocation, 
and may imply that an increase in first cost has not been accom- 
panied by a corresponding increase in the prices placed against 
output; more usually, perhaps, the explanation would be found 
in inferior cutting, which has resulted in the raw material not being 
used to best advantage, with an undue proportion in consequence 
of cut leather of lowest values, or waste. 

From the brief outline of the subject-matter, it is clear that the 
value of cost records depends upon their accuracy as an analysis 
of cost, and while it is not convenient in every case to render them 
a part of the system of double entry book-keeping, and to express 
them in the form of accounts — as will possibly be found to be the 
case with abstracts, such as the Colliery Cost Sheet, based upon 
an average unit — yet it is essential that they should at all times be 
capable of being agreed with the books of account, and thus of 
being proved to be an accurate record. 

Where the analysis of cost is expressed in the form of an abstract, 
the prime cost, that is, in respect of materials, labour, etc., can 
usually be ascertained without difficulty, and where the abstract 
covers a sufficiently extended period, the greater part of the 
remaining items of productive expense can be calculated with fair 
accuracy: but in respect of Oncost, estimate is essential, and 
error may occur. Such estimates should, therefore, be revised 
from time to time. 

In general it cannot be too clearly insisted upon how very 
important it is that in connection with cost records there should 
be a thorough and sound system of organisation in regard to all 
financial transactions, and particularly wages and materials. 

It is obvious from the matter submitted that Cost Accounts 
constitute a wide and important section of accounting, the scope 
of which can be but generally indicated in the space available. 



Dr. 



MINISTRY OF 

NATIONAL FILLING 
PRODUCTION AND TRADING ACCOUNT. 



I. To Value of Work in Progress 
Commencement of Period 



II. 



III. 



IV. 



VI. 

VII. 

VIII. 



Manufacturing Materials — 

On hand at commencement of period . 
Purchases during period — 

(a) From Ministry 

\b) ,, Other Sources 

Less — Sales of Materials . 
Sales of Scrap. 
On hand at end of period . 

Net Cost of Materials Used 
Labour — 

Productive .... 

Non-Productive 

Superintendence 

Repairs and Maintenance — 
Buildings .... 

Roads and Railways 

Plant 

Tools 



Power, Light, 
Power 
Light . 
Heat 
Water . 



Heat and Water- 



Sundry Shop Stores 

Clothing . 

Other Factory Expenses 

Rent 

Rates 

Canteen and Mess Room Expenses 

Motor Car Expenses 

Compensation . 

Cleaning . 

Laundry . 

Welfare . 

First Aid and Medical Attendance 

Watchmen, Police, Military Guard, 
and Fire Brigade . 

Workers' Tickets 

Carriage and Cartage 

Miscellaneous . 



228 



MUNITIONS OF WAR. 

FACTORY AT 

From To.. 



Cr. 



I. By Sundry Credits — 

(a) Oncost charged to Capital 

(6) „ „ „ Special Accounts 

{0) 

{d) 
{e) 
if) 

II. „ Value of Work in Progress at End 

OF Period . . . . . 



Ill, „ Balance Carried Forward — 

{a) Charged through monthly Cost 
Accounts . . . . . 

Add/Deduct. — Difference 



229 



Dr. 



MINISTRY OF 

NATIONAL FILLING FACTORY 
PRODUCTION AND TRADING ACCOUNT. 



IX. To Management and Office Expenses — 
Managing Agents' Remuneration 
Management Salaries 
Office Salaries 
Printing and Stationery 
Travelling Expenses 
Office Expenses 

X. „ Depreciation . . . . . 

XI. „ Special Expenditure — 

(a) Reserve for loss on Canteen 

(b) 

(c) 

{d) 

(e) 
if) 

XII. To Cost of Sales and Deliveries of Finished 
Products during Period — 
Stock at commencement of period 
Cost of Production during period brought 
forward ...... 



Deduct — Stock at end of period 



XIII. „ Special Expenditure Not Charged 
THROUGH Monthly Costs. 
(«) 
{b) 

id) 
(e) 



XIV. „ Excess of Value of Deliveries at Standard 
Prices over Cost during Period 



This is the Account referred to in 

Report of this date. 

Auditor. 

Date 



230 



MUNITIONS OF WAR. 

AT 

From To.. 



B 



Cf. 



IV. By Deliveries to the Ministry at Stand- 
ard Prices, as per Schedule 
attached . . . . . 



V, ,, Sales and Transfers of Manufac- 
tured Articles (other than Deli- 
veries TO THE Ministry) . 



VI. ,, Miscellaneous Receipts. 
(a) Interest 
(6) Cash Discounts . 



VII. 



Excess of Cost over Value of Deliveries at 
Standard Prices during Period. 



Approved by, and signed on behalf of the 
Directing Board in pursuance of Minute 
dated 

Director. 

Secretary. 

Date 

Factory Accountant. 
Date 

231 



MINISTRY OP 

NATIONAL FILLING FACTORY 
BALANCE SHEET 



CAPITAL AND LIABILITIES. 

Advances by Ministry of Munitions. 
Balance at Credit on 19 

Cash Advances .... 

Payments made by the Ministry 
Materials supplied by the Ministry 



Deduct — 

Value of Products delivered at Standard 
Prices ...... 

Add/Deduct Balance of Production A/c 
Net Production Cost of Deliveries 
Purchases on behalf of the Ministry 



Balance at Credit of the Ministry 
II. Sundry Liabilities. 
Creditors' Accounts . 
Wages and other charges accrued 



III. 



Reserves. 
For Depreciation 
.. Canteen Loss 



Approved by and signed on behalf of the Directing 
Board in pursuance of Minute dated 

Director. 

Secretary. 

This is the Balance Sheet referred to in my 
Report of this date. 

Auditor. 

Date 

232 



MUNITIONS OF WAR. 

AT 

as at 



ASSETS. 

I. Works and Plant. 

Land . . .... 

Buildings — 

New Construction .... 
Alterations of Buildings 
Equipment of Buildings 
Water, Light, Heat and Drainage . 

Roads and Railways 

Plant and Machinery — 

Plant Purchased .... 
Shafting, Pulleys, Cranes and Belting 
Erection of Plant .... 

Loose Plant and Tools, Gauges, etc. . 
Motive Power Plant 
Rolling Stock and Transportation Equipm't 
Furniture and Moveable Fittings 
Canteen Equipment .... 
Miscellaneous Construction Charges . 



II. Floating Assets. 

Stocks on Hand, viz. — 
Finished Products 
Work in Progress . 
Materials and Components 
Sundry Shop Stores 
Clothing 
Sundry Stocks 



III. Outstanding Accounts and Unexpired 
Charges — 

Outstanding Accounts . . . . 

Unexpired Charges . . . . 

IV. Cash Balances — 

In Bank ...... 

On Hand ...... 



.Factory Accountant. 



Date. 

16— (1377) 



233 



CHAPTER XVII 

SINGLE AND DOUBLE ACCOUNT 

In an earlier chapter it was stated that the ascertainment of 
divisible profits was dependent on the preparation of an accurate 
Balance Sheet. There are various forms in which a Balance Sheet 
may be prepared, which are determined by the application of 
certain general principles in the valuation of assets. 

Under the system of double entry, profit as appearing in a 
Balance Sheet is confirmed by the Profit and Loss Account. This 
is dependent on the books containing a full record of all assets 
and liabilities, which, it must be borne in mind, is not a necessary 
consequence of double entry. The books may deliberately fail 
to give such a record, as, for instance, in the case of Life Assurance 
Companies; here, the books are kept on double entry principles; 
they record the accrual and receipt of income, the realisation of 
assets, the accrual and discharge of matured liabilities; but they do 
not show from day to day the substantial liability accruing upon 
non-matured life policy and annuity contracts. A Balance Sheet 
extracted from the books would show, on the one hand, the amounts 
of Proprietors' Capital and Reserve Funds, together with liabilities 
immediately payable; on the other hand, the assets in the form of 
investments, debts, bank balances, etc., the surplus of the latter 
over the former appearing to the credit of Revenue Account. 
Revenue Account, on examination, will be found to be built up, 
on the one hand, of receipts from premiums and for annuity con- 
tracts granted, interest on investments, etc., and on the other, of 
administration and other expenses and claims paid on matured 
risks. In order that the true position can be seen, allowance has 
to be made for the value of the liability, as actuarially ascertained, 
of risks maturing at a future date and for the acceptance of which 
present premiums, etc., represent the consideration. The true sur- 
plus, or balance of profit, is not the balance of Revenue Account 
as it appears in the books and in the Balance Sheet, but the excess 
of Revenue Account over the liability mentioned, which so far as 
the books of account are concerned is unrecorded. This surplus 

234 



SINGLE AND DOUBLE ACCOUNT 



235 



is ascertained at regular, usually quinquennial, intervals by the 
preparation of what is termed the Valuation Balance Sheet. 



Dr. 



VALUATION BALANCE SHEET. 
Date 



Cr. 



To 



Net Liability under 
Assurance and Annui- 
ty transactions (as per 
Summary Statement) 
Surplus 



By Life Assurance and 
Annuity Funds (as per 
Balance Sheet) . 

,, Deficiency . 



The surplus shown will, by comparison with the last Valuation 
Balance Sheet and with due allowance for dividends paid, disclose 
the amount of profit or loss made in the period intervening. 

The instance illustrated has been set out to emphasise the 
importance of the Balance Sheet, true and complete, as the index 
of surplus or deficiency on Revenue or Profit and Loss Account. 

It is obvious that variation in principle in regard to valuation 
of assets may affect very substantially the amount of such surplus 
or deficiency. 

If it be conceded as a matter of argument that life assurance 
companies should value investments on the basis of cost or market 
value, whichever is the lower, the adoption in a given case of the 
principle of valuation at cost, irrespective of market value, would 
obviously give a misleading result. 

It is accordingly with the forms of Balance Sheets and the 
principles applied in the preparation of varying forms that we are 
now concerned. Of these, the two most important are known as 
the Single and Double Account systems. 

Single Account Balance Sheet. 

Under Single Account, the Balance Sheet is a single statement, 
comprehensive of all assets and liabilities properly entering there- 
into, while under Double Account the Balance Sheet, as explained 
later, is in two parts. 

The variation in form is determined by the character of the busi- 
ness, and the nature of the assets held. There is, for^example, 
an obvious difference in character as between a trading concern 



236 ACCOUNTING 

dealing in a staple article, and a railway company; the former 
may have assets such as stock, book debts, bank balances, etc., 
while the latter will have, not only these assets, but others repre- 
sented by expenditure upon permanent way, stations, land, etc., 
which are the foundation of the trading operations and in every 
sense non-fluctuating and permanent. There is thus the contrast 
between a business employing for the most part liquid assets, 
circulating and changing in the forms of cash, stock, book debts, 
etc., and producing increment in the process, and that engaged 
in the working for profit of capital expended for permanent 
reproduction of gain. 

Under Single Account, the form most frequently adopted, the 
Balance Sheet should be prepared in such manner as to present 
assets and liabilities (subject to certain qualifications) at their 
actual existing values to the business as a going concern. As 
regards floating or circulating assets, this is simple; they are to be 
valued at cost or market value, whichever is lower. As regards 
assets of more than temporary value, such as plant, machinery, 
fixtures, etc., it is customary and proper to regard their cost as 
being exhausted proportionately over the period of their effective 
working life. Fluctuations in realisable value are therefore ignored; 
and this is sound, for such assets are not acquired for sale, but for 
use. Some assets, or expenditure, may be regarded permanently 
as of the value of their original cost, such as goodwill. 

Double Account Balance Sheet. 

Under Double Account, also, certain assets may be regarded as 
permanent for the purposes of the undertaking, but are then set 
out in a separate part of the Balance Sheet called Receipts and 
Expenditure on Capital Account, in which will appear also a state- 
ment of the amounts received in respect of Share and Loan Capital. 
The general form of Double Account is illustrated by reference to 
the accounts of a Railway Company on pages 242-247. 

The difference in form permits more freely the appreciation of 
the general distinction in principle of the two systems, for under 
Double Account it is in general assumed that where assets per- 
manently acquired are maintained in thorough efficiency out of 
Revenue, variations in value, whether from depreciation or other 
causes, may be ignored in the calculation of profit earned. Under 



SINGLE AND DOUBLE ACCOUNT 237 

this system, Revenue bears a charge for maintenance, which may 
include repairs, but will include renewals and replacement. 

In the operation of the system of Double Account, variations from 
strict theory may be found to exist, by which the effect approxi- 
mates in general to the theory of Single Account. Cost of renewals 
may be greater or less than original cost, and the accounts record- 
ing capital expenditure may be adjusted on renewal of an asset to 
the last, or replacement, cost. Again, the charge for maintenance 
includes the actual current expense of repairs and renewals; this, 
under normal working, may prove roughly constant, and be a 
charge upon Revenue of an amount approximately equivalent to 
the total of current depreciation and repairs. But there must be 
some periods when this will not be so; for example, in early years 
renewals will be few and maintenance charges low, although the 
operations of those years will contribute to the need for expenditure 
at a later date, or renewals may for a time be largely suspended, 
as upon railways during the war. An even and regular charge is 
therefore to be secured by providing a reserve for maintenance. 
Again, under Double Account an asset regarded as capital expendi- 
ture may become unproductive, or even valueless; the asset may 
not be renewable, or it may not be sought to renew it. In these 
circumstances. Revenue would bear no charge for maintenance, and 
the essential principles of sound accounting require the provision 
of a Depreciation Fund in respect of a loss of this kind. 

The application of the Double Account system is illustrated by 
the following examples — 

(1) An Electric Lighting Company, having laid down a main at 
a cost of 02,500, finds it necessary to increase the supply of cur- 
rent. It therefore replaces the main as to one-half its length by 
a larger main at a cost of £9,500, and lays down a new and 
auxiliary main alongside the other half for an outlay of £4,250. 
It is understood that the cost of replacement and renewal has 
increased by 20 per cent, since the original expenditure. 

In these circumstances, the replacement is of an asset costing 
originally, say, £6,250, which, having regard to the increase in cost, 
could now be acquired only for £7,500. Under the strict principle 
of Double Account, this amount, £7,500, should be charged to 
Revenue Account, and the balance of £2,000, as well as the outlay 
of £4,250, be treated as capital expenditure. 



238 ACCOUNTING 

Sometimes, however, the asset account is charged with such part 
of the cost (£9,500) as is in excess of the existing book value of the 
asset replaced, namely, £6,250, thus introducing into the books 
the increase in renewals cost. 

(2) A Railway Station, erected in 1860 at a total cost of £70,000 
is, in the year 1900, demolished and replaced by a larger one, 
representing an outlay of £120,000. It is estimated that the increase 
of cost in materials and labour between the years stated is 15 per 
cent. Old materials are estimated to be worth £8,000. 

In this case, the fair charge to Revenue is £70,000 plus 15 per 
cent, (i.e., £80,500), less £8,000; and the balance of £47,500 is 
additional capital expenditure. As in the preceding illustration, 
the method may be followed of treating as capital outlay the full 
amount of £120,000 and therefore of charging to Revenue the 
existing book value of the old station, less the realised value of 
the materials. 

In regard to the accounts of Limited Companies, it is desirable 
to indicate certain variations from strict principle in the application 
of the Single Account system. From the fact that a legal distinction 
has been drawn between Revenue losses and those affecting Capital 
Account, it is not possible to define " profits " in relation to Limited 
Companies in precise terms. Divisible profits may, however, be 
said to be — 

the balance of earnings resulting from the application of the 
Company's capital to the purposes indicated in the Memoran- 
dum and Articles of Association, after meeting out of those 
earnings all such losses and charges as are, by law or by the 
constitution of the Company, required to be met thereout. 

From the decisions of the Courts, it appears that the Single 
Account method is not necessarily to be applied with strict accuracy 
in estimating the profits of Limited Companies. 

The dominant idea of the Single Account system is expressed 
in the following extract from judicial observations — 

" In declaring a dividend, in my opinion, in trading concerns, the Directors 
are entitled to put an estimate on the value of their assets from time to time, 
in order to ascertain whether there is or is not a surplus remaining after 
providing for liabilities (including, of course, paid-up capital), and where 
they make those valuations from time to time on a just and fair basis, and 
take all the precautions which ordinary prudent men of business engaged 
in a similar business would do, they are entitled to treat the surplus thus 
ascertained as profit." 



SINGLE AND DOUBLE ACCOUNT 239 

It has already been indicated that a variation from the strict 
principle of the Single Account system has been drawn between 
losses on Revenue and Capital Account respectively. 

Mr. Justice Buckley in his work on the Companies Acts says — 

" Lee V. Neuchatel Asphalte Co. has now shown the true principle to be 
that capital account and revenue account are distinct accounts, and that 
for the purpose of determining profits you must disregard accretion to, or 
diminution of, capital." 

It is not always easy to determine whether a specific loss is 
chargeable against Capital or Revenue. The intention appears to be 
that fluctuations in value of fixed assets, as distinct from deprecia- 
tion, should not be held to affect Revenue; for all fixed assets, 
other than land and goodwill, being " fixed " only by comparison 
with assets of less permanent nature, must necessarily diminish 
in value by use. There is no doubt that the value of circulating 
capital must be maintained — 

" Fixed capital may be sunk and lost, and yet the excess of current receipts 
over current expenses may be applied in payment of a dividend, though where 
the income of the Company arises from the turning over of circulating capital 
no dividend can be paid unless the circulating capital is kept up to its original 
value, as otherwise there would be a payment of dividend out of capital." — 
Verner v. General and Commercial Trust, Limited (1894), 2 Ch. 239. 

The general effect of the various interpretations of the Companies 
Acts upon this question appears to be that a Company shall not 
pay away its capital in dividends; but that it is not necessary 
that it should at all times have a surplus of assets over liabilities 
(other than capital) equal to its capital; and, that if a loss can be 
shown to be a loss on Capital Account, it is not necessarily one of 
which account need be taken in arriving at profits. 

On the other hand, it must not be supposed that a profit on 
Capital Account is distributable amongst the shareholders without 
reference to the Revenue Account, or the remaining items of 
Capital Account. 

"... the question of what is profit available for dividend depends upon 
the result of the whole accounts fairly taken for the year — capital, as well 
as profit and loss — and although dividends may be paid out of earned profits 
in proper cases, although there has been a depreciation of capital, I do not 
think that a realised accretion to the estimated value of one item of the 
capital assets can be deemed to be profit without reference to the result of 
the whole accounts fairly taken." — Foster v. New Trinidad Lake Asphalte Co. 
(1901), 1 Ch. 208. 



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241 



Dr. 



MIDLAND 

No. 4.— RECEIPTS AND EXPEN 

Year ending 





Amount expended 


Amount expended 




To Expenditure. 


to December 31st, 


during Year, 


as 


Total. 




1918. 




per No. 5. 








I 


5. 


d. 


£ s. 


d. 


£ 5. d. 


Lines open for Traffic . 


79,300,636 


4 


9 


44,483 6 


11 


79,345,119 11 8 


Lines not open for Traffic — 














New Lines .... 


321,228 


10 


8 


46,269 16 


4 


367,498 7 - 


Widenings of and addi- 














tions to existing Lines 


28.188 


12 


2 


13,410 5 


1 


41,598 17 3 


Lines in Ireland 


5.757.599 


19 


3 


16,604 7 


1 


5,774.204 6 4 


Lines Jointly Owned . 


6.801.771 


13 


11 


26.323 5 


3 


6,828.094 19 2 


Lines Jointly Leased . 


622,265 


14 


7 


Cr.35,000 





587.265 14 7 


Rolling Stock .... 


17.835,288 


10 


2 


92,274 13 


11 


17,927,563 4 1 


Manufacturing and Repair- 














ing Works and Plant — 














Land and Buildings . . 


1,775,539 


5 


8 


1,963 18 


11 


1,777,503 4 7 


Plant and Machinery 


794,243 


15 


4 


7,972 16 


4 


802,216 11 8 


Total Capital Expended 














upon Railway . . 


113,236.762 


6 


6 


214,302 9 


10 


113,451,064 16 4 


Steamboats .... 


469,716 


5 


2 






469,716 5 2 


Marine Shops and Plant . 


7,136 


12 


4 


.... 




7,136 12 4 


Canals 


246,268 


1 


8 


Cr. 518 17 


4 


245,749 4 4 


Docks, Harbours, and 














Wharves .... 


1,229,453 


18 


1 


.... 




1,229,453 18 1 


Hotels 


2,366,034 


19 


9 


128,232 2 


5 


2,494,267 2 2 


Electric Power Stations, 














etc 


390,700 


5 


9 


3.182 4 


6 


393,882 10 3 


Land, Property, etc, not 














forming part of the 














Railway or Stations — 














Used in connection with 














Railway working . . 


432,850 


- 


- 


616 1 


4 


433,466 1 4 


Not used in connection 














with Railway working 


4,767,737 


12 


5 


75,450 13 


1 


4,843,188 5 6 


Subscriptions to other Com- 














panies (for details see 














Table No. 4 (a) ) . . 


6,121,335 


18 


10 


111,544 16 


- 


6,232,880 14 10 


Total Expenditure . . 


129,267,996 





6 


532,809 9 10 


129,800,805 10 4 




TAL . . . 


• 




£ 




To 


• 


. . . . 


129,800,805 10 4 



242 



\ 



RAILWAY. 

DITURE ON CAPITAL ACCOUNT. 
31s/ December, 1919. 



Cr. 



By Receipts. 



Amount received 

to December 31st, 

1918. 



Amount received 
during Year. 



Total. 



Shares and Stocks (No. 2) 
Debenture Stock (No. 3) 



98.255,132 17 9 
31.814,360 6 



130,069,493 3 9 



Premiums 
on Shares 
and Stocks 

Premiums 
on Deben- 
ture Stocks 

Total 

Premiums 

Discounts 
on Shares 
and Stocks 

Discounts 
on Deben 
ture Stocks 

Total 
Discounts 



Amount to 

December 31st, 

1919. 



s. d. 



4.103.890 1 3 



593.952 



4.697.842 1 8 



6.794,419 15 2 



1.674,251 4 2 



8,468,670 19 4 



Balance of Premiums and 
Discounts 

Total Receipts . 

By Balance .... 



Dr.3,766,860 7 10 



126,302,632 15 11 



£ s. d. 

9.237 15 6 
9.387 13 3 



£ s. d. 

98.264,370 13 3 
31,823.747 19 3 



18.625 8 9 



130.088.118 12 6 



Dr.3.968 9 10 



Dr. 3,770. 828 17 8 



14,666 18 11 



126,317,289 14 10 

3,483,515 15 6 



Total £129,800,806 10 4 



243 



No. 1 8.— GENERAL 



Dr. 



Year 1918. 



To Unpaid Interest and Dividends 

Interest and Dividends payable or accru- 
ing and provided for .... 

Amount due to Railway Companies and 
Committees ..... 

Midland Railway Savings Bank 

Superannuation and other Provident Funds 

Accounts Payable .... 

Liabilities Accrued .... 

Miscellaneous Accounts .... 

Signalling Equipment Improvement A/c 

Leasehold Redemption Fund . 

Fire Insurance Fund .... 

Depreciation Funds — 

Railway ...... 

Steamboats (including Insurance Fund) 
Other Businesses .... 

General Reserve Fund .... 

£ s. d. 

Balance available for Di- 
vidends and Reserve 
as per A/c No. 9 — 

£ s.d. 
Divi- 
dends 4,722.911 4 1 
Reserve 200.000 - - 



Less Interim Dividends 
paid as per Statement 
No. 9 (a) . 



4,922,911 4 1 



2.100.917 16 



£ s. d. 

28.136 13 11 



500,423 6 - 

278,990 16 8 

161,172 19 11 

2.062,002 6 - 

887,015 19 7 

68.862 6 9 

147.628 11 11 

26,792 18 - 

97.229 17 10 

490.984 4 4 

2,877,635 15 - 

338,714 18 3 

97,584 2 8 

1,044,162 12 11 



2,821,993 8 1 



£ 

25,708 



613,018 
522,525 

1.896,780 

790,570 

76,250 

123,734 

40,897 

92,816 

484,665 

1,535,040 

302,061 

83,804 

844,161 



4,829.473 
200.000 



5,029,473 
2,149,065 



2,880,408 



£11,929,330 17 10 11,212,439 



244 



BALANCE SHEET. 



Cr. 







Year 1918. 


By Capital Account, Balance at Debit 
thereof, as per Account No. 4 


3.483,515 15 


d. 
6 


i 
2,965.363 


i s. d. 
Cash at Bankers and in 

hand . . 2,914,115 18 4 
Cash on Deposit at 

Interest . . 


2,914,115 18 


4 




879.381 
2.100.000 




2.979.381 


Investments in Consols and Government 
Securities ...... 


177,450 - 


- 


27.450 


Investments in Stocks and Shares held by 

the Company, and Advances to other 

Companies, not charged as Capital 

^L Expenditure . . . . . 


11,009 3 




11.009 


^B Investments in Company's Own Stocks 
^m received in exchange for Investments 
^m in Stocks and Shares of other Railway 
^H Companies . . . . . 


418,057 8 


11 


418.058 


^B Stock of Stores and Materials 


2,191.514 8 


5 


2.143,119 


^B Outstanding Traffic Accounts 


1.793.206 15 


6 


1.896.346 


^B Amount due by Railway Companies and 
^■t Committees . . . . . 


287.061 12 


3 


277.778 


^B Amount due by Railway Clearing Houses 


65.586 6 


6 


76.740 


^B Amount due by Postmaster-General 


37.282 19 


1 


35.296 


^B Accounts Receivable .... 


195.310 19 


7 


106.731 


Miscellaneous Accounts .... 


318.163 8 


8 


234.591 


Suspense Account — 








Expenditure on Works on land not the 
property of the Company 


37,056 2 


1 


40.677 


« 


11,929,330 17 10 


11.212.439 



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247 



CHAPTER XVIII 

DEPRECIATION 

The term " depreciation " is used in accounting in description of 
the loss in value of assets that arises from use, and is therefore to be 
distinguished from variation in value arising from obsolescence, 
fluctuation, or wear and tear. It should be observed, however, 
that in measuring the provision against such loss, obsolescence is 
usually taken into account, and depreciation, being commonly 
based not on the actual, but rather on the effective, working life 
of the asset in question (in which obsolescence is a determining 
factor), is therefore inclusive of the latter. 

The term " fluctuation " implies the change in the market 
values of assets, that results from the operation of the law of 
supply and demand. Thus, the market price of a raw material 
may fluctuate; investments frequently alter in value day by day; 
and similarly the value of an asset subject to depreciation may 
change from causes not primarily induced by use. 

With regard to wear and tear, the possession and use of an asset 
used for reproduction of value involve a continuous expenditure 
to maintain it in an efficient working state. The cost of repairs 
or of renewals of small parts of some piece of machinery is an 
example of the nature of the loss or charge covered by the term. 

The short description of the differences between the various 
forms of charges named is further illustrated by succeeding 
remarks. 

It is necessary for purposes of explanation of the nature of 
depreciation that the distinction between fixed and floating assets 
should be realised, that is, between those required for purposes 
of constant reproduction of value, such as machinery and plant, 
and the like, including also assets such as buildings, by which 
such reproduction is assisted, and those which are subject to con- 
version and permutation in the ordinary course of trading 
operations, such as book debts, cash and stock. 

With regard to the latter, their whole worth is measured by their 
equivalent in cash, and in estimating their value for the purposes 

248 



DEPRECIATION 249 

of a Balance Sheet it is customary to make such reserves as will 
reduce them when standing at a higher figure to this equivalent. 
But with regard to the former, valuation for the purposes stated 
is not to be determined upon the basis of an immediate realisation, 
but rather upon the assumption of their value becoming exhausted 
over the whole period of their effective use. 

More precise illustration may be afforded by the consideration 
of the proper method of treatment of machinery and plant. 

The purchase of such assets necessarily involves expenditure 
(assumed, say in a particular case, as £300). The estimate of the 
effective working life (having regard to the possible factor of obso- 
lescence) is (say) ten years, and at the end of that period it is 
calculated that the residual value will be £50. It is obvious that 
a loss will eventually be suffered of £250, and it is clear that the 
loss so arising is attributable to, and should be borne by the profits 
of, those years which have benefited by the use of the asset. 

In apportioning the necessary charge, regard must be had to 
the benefits produced in each of the various years over the period, 
and this may be a matter of considerable difficulty as an exact 
calculation. It is clear, however, that the loss is one to be measured 
by the ultimate worth of the asset when its use ceases to be of 
advantage, and not by the fluctuating value which it may possess 
at intermediate periods, and that in calculating the provision 
necessary against such loss, regard must be had to the fact of its 
having been purchased not for resale in the ordinary course of 
trading operations, but for purposes of reproduction of value. 

From the fact that the use of the asset for the purposes of earning 
revenue is the main cause of its depreciation, it is clear that the 
loss arising should be regarded as a working expense. 

The loss will not actually necessitate expenditure in the form 
of renewals until the asset is completely exhausted. This, how- 
ever, when incurred, will be due to its use over an extended period, 
and it is therefore fair and, as a matter of strict accounting, neces- 
sary, that all years which have derived benefit from the original 
expenditure, should make provision towards the loss. Revenue 
Account should not be charged with the cost of renewals, but with 
an annual provision for depreciation, and renewals, as and when 
incurred, can be charged against the provision so made. 

There are various methods of providing for depreciation. That 

17— (1377) 



250 



ACCOUNTING 



most commonly used, known as the " straight-line method," con- 
sists in charging Revenue Account year by year with an amount 
based upon a fixed percentage of the original cost of the asset 
(assuming that there is no residual value) or of the loss, after 
taking into account the residual value, if any. 



1. PLANT AND MACHINERY ACCOUNT 

Operated on " Straight-line Method." 

Cost of Plant, £300 ; estimated life, 10 years ; estimated residual value, £50 
from depreciation, estimated £250. 
Dr. 



Cr. 



1910. 



To Cash . 



£ 

300 



300 



1910. 
Dec. 31 

1911. 
Dec. 31 

1912. 
Dec. 31 

1913. 
Dec. 31 

1914. 
Dec. 31 

1915. 
Dec. 31 

1916. 
Dec. 31 

1917. 
Dec. 31 

1918. 
Dec. 31 

1919. 
Dec, 31 



Cash (sale). 
Profit & Loss- 



— Deprec'n 


L 


s. 




25 - 




25 


- 




25 


- 




25 


- 




25 


- 




25 


- 




25 


- 




25 


- 




35 


_ 


— Deprec'n 


40 


- 




300 


- 



A similar result may be arrived at by crediting the amounts 
charged to Profit and Loss Account to a Depreciation Fund, which 
will accumulate, with the adjustment in the last year of the short- 
age in the provision necessary, to the amount of £265. The cash 
realised in respect of the residual value will be credited to the 
asset as before, and the balance of the asset account written off 
against the Depreciation Fund. 

The method illustrated may be operated without difficulty where 
applied to one article, but where Plant and Machinery Account 
represents many assets, acquired at various dates and with varying 
periods of effective working life, the system presents difiiculties. 
The method frequently adopted in such a case is that of charging 
Profit and Loss Account with a fixed percentage on the balance 
of the asset account year by year. 



DEPRECIATION 



251 



For purposes of explanation, this system is illustrated, first, in 
its application to one asset, and then in regard to a general Plant 
and Machinery Account. 

IIa. Calculation of Charge for Depreciation of an Asset by a Charge Based 
ON A Percentage of Value at the Beginning of the Year. 

PLANT (DYNAMO) ACCOUNT. 



1917. 
Jan. 1 


To Cash .... 
To Balance 

To Balance 

To Balance 


120 


s. 


d. 
1. 

10 


1917. 
Dec. 31 

1918. 
Dec. 31 

1919. 
Dec. 31 


By Profit & Loss— Depre- 
ciation at 20 % . 
„ Balance 

By Profit & Loss Depre- 
ciation at 20 % . 
„ Balance 

By Profit & Loss Depre- 
ciation at 20 % . 
„ Balance 


i 

24 
96 


s. 

— 


d. 




120 


s. 

16 
16 


120 


- 


1917. 
Dec. 31 


k 


i 

19 
76 


s. 

4 
16 


d. 




96 


96 

15 
61 


7 
8 


- 


1918. 
Dec. 31 


76 


2 
10 




76 


76 


16 


- 


1919. 
Dec. 31 


61 


8 









Under this system, the rate employed should be such as to reduce 
the asset to its estimated residual value by the time it ceases to 
be of use for purposes of reproduction. 

It will be observed that the charge for depreciation shows a 
decrease each year, and the argument usually advanced in favour 
of this method is, that Revenue Account is burdened with a lesser 
charge year by year as the expenses of maintenance increase. 
This, however, involves an average of expenses of different nature, 
and is unsound in principle; the system illustrated, is not, 
therefore, to be recommended for application in respect of a single 
item of expenditure. 

Where additions to, and renewals of, the asset are fairly constant 
in amount year by year, the calculation of depreciation as a per- 
centage of the yearly opening balance may result in charging 
Profit and Loss Account with a fair and reasonable figure year by 
year, and in ,the statement of the balance of the account at an 
amount approximate to its value to a going concern. This method, 
however, is not necessarily guided by scientific principles and may 
therefore prove inaccurate in individual cases. 



252 



ACCOUNTING 



IIb. Illustration of Operation of Depreciation Charge, Calculated by a 

Percentage upon the Opening Balance of the Asset Account, where the 

Account is Charged with Frequent Additions and Renewals. 

PLANT AND MACHINERY ACCOUNT. 



1917. 
Dec. 31 

1918. 
Dec. 31 



1918. 
Dec. 31 

1919. 
Dec. 31 



1919. 
Dec. 31 

1920. 
Dec. 31 



1920. 
Dec. 31 



To Balance 
Cash . 



To Balance 
„ Cash . 



To Balance 
„ Cash . 



To Balance 



i 

1,230 


s. 
10 


d. 


1918. 
Dec. 31 


112 


- 


- 


„ 


1,342 


10 


~ 






= 






1,250 


s. 
4 


d. 
3 


1919. 
Dec. 31 


94 


10 


- 


„ 


1,344 


14 


3 




1,250 


s. 
18 


d. 
11 


1920. 
Dec. 31 


124 


3 


- 


„ 


1,375 


1 


" 




1,281 


5 


6 





By Profit & Loss— Depre- 
ciation at 7 J % . 
Balance 



By Profit & Loss — Depre- 
ciation at 7J % . 
Balance 



By Profit & Loss— Depre- 
ciation at 7 J % . 
, Balance 



£ 


s. 


92 
1,250 


5 
4 

10 


1,342 


£ 


s. 


93 
1,250 


15 
18 


1,344 


14 


£ 


s. 


93 
1,281 


16 

5 


1,375 


1 







There are in use two further methods, similar in principle, 
although somewhat different in operation, known as the Sinking 
Fund and Annuity systems respectively. With these, it is sought 
to make allowance for the interest presumed to be " earned " by 
the capital invested in the asset. 

The one system proceeds upon the assumption that the deprecia- 
tion charge should be such as to write off the asset with the interest 
calculated to be attributable to the balance of value regarded 
from year to year as unexhausted, while under the other the annual 
provision for depreciation is either regarded as producing interest 
or is increased by the interest actually received upon investments 
made in respect of the sums set aside. 

Assuming an equivalence in the rate of interest under either 
method — an assumption adopted for purposes of the explanation 
given in succeeding illustrations — the balance of the asset account 
under the former wiU be the same as the difference between the 
amount of the asset account, less the Sinking Fund balance, under 
the latter. 

The principle involved in making allowance for interest in 
calculation of the depreciation charge has been questioned, and 



DEPRECIATION 



253 



it is worthy of note that in the proceedings under arbitration in 
respect of the transfer to the Government of the assets of the 
National Telephone Co. the merits of the Sinking Fund, as opposed 
to the " straight-line," method, were discussed, with the result 
that the latter was adopted in that case as the proper method of 
calculating depreciation and so of arriving at the value of the 
assets transferred. 



in. Annuity Method, illustrated in reference to a Leasehold Asset, 

Purchased for £1,000, having an Unexpired Period of 10 Years ; Interest 

at 6 % per annum. 

ASSET ACCOUNT. 



1917. 
Jan. 1 
Dec 31 



1917. 
Dec. 31 

1918. 
Dec. 31 



1918. 
Dec. 31 

1919. 
Dec. 31 



1919. 
Dec. 31 



To Cash . 
„ Interest at 6 % p.a. 



To Balance 
„ Interest at 6 % p.a. 



To Balance 

Interest at 6 % p.a. 



To Balance 



1,000 
60 


s. 


d. 


1917. 
Dec. 30 


1,060 


- 


- 




i 
924 


s. 
2 


d. 

7 


1918. 
Dec. 31 


55 


9 


- 


" 


979 


11 


7 


843 


s. 
14 


d. 
2 


1919. 
Dec. 31 


50 


12 


5 
7 


" 


894 


6 


758 


5. 

9 


d. 
2 





By Profit & Loss — Depre- 
ciation 
Balance 



By Profit & Loss— Depre- 
ciation 
Balance 



By Profit & Loss — Depre- 
ciation 
Balance 



i 


s. 


135 


17 


924 


2 


1,060 


- 


i 


s. 


135 


17 


843 


14 


979 


11 


£ 


s. 


135 


17 


758 


9 


894 


6 







As an alternative to the treatment of the asset account in the 
manner indicated, the depreciation charge is sometimes covered 
by an insurance policy, in which case the annual premium, which 
naturally is inclusive of interest, forms the charge against Revenue 
Account. 



IV. Sinking Fund Method ; Particulars of Asset as before ; Interest calculated 
AT Assumed Rate of 6 % per annum, without deduction of tax. 

ASSET ACCOUNT. 



1917. 
Jan. 1 



To Cash . 



£ 

1,000 



i-\ 



254 



ACCOUNTING 



SINKING FUND. 



1917. 
Dec. 31 

1918. 
Dec. 31 



1919. 
Dec. 31 



By Profit & Loss Account 



Interest (6 % on £75 
17s. 5d.) . 

Profit & Loss Account 
Interest (6 % on £156 
5s. lOd.) . 
Etc. etc. 



It will be observed that the annual provision from Profit and 
Loss Account, which is credited to the Sinking Fund, represents 
the difference between the charge for depreciation upon, and the 
amount of interest debited against, the asset account in the first 
year under the Annuity method. In subsequent years the amount 
of the asset account, less the amount to the credit of the Sinking 
Fund (Method IV), will be identical with the balance of the former 
account as dealt with under Method III. 

It should be observed that the illustration last given is entirely 
theoretical in the calculation of interest at the rate of 6 per cent, 
per annum and in the estimate of a full year's interest upon the 
exact amount of the Sinking Fund as accumulated to the end of 
any year. These assumptions are made mainly to permit of 
comparison between the Annuity and Sinking Fund systems. 

The methods of providing for depreciation as illustrated have 
been operated on the basis of a fixed percentage which has been 
assumed to cover the loss arising. It is obvious, however, that 
where an asset account, such as Plant and Machinery, includes 
many items varying in cost and duration of effective use, the 
adoption of a fixed percentage may work unevenly. In the case 
of an engineering works, for instance, it is hardly possible to allow 
for the depreciation of plant at one general rate upon the book 
value of the asset and thereby to cover the loss in respect of two 
such distinct types of plant as (say) lathes and steel-rolling 
machinery. It is desirable in such instances that depreciation, 
which forms an important element in the cost of production, should 
be measured upon some scientific basis. For this purpose, a com- 
plete register of all items of plant and machinery grouped in the 
financial ledger under the one general heading is desirable. The 
register should be so kept as to show the history of each separate 
machine, etc., the depreciation allowance made in respect of it; 



DEPRECIATION 



255 



and its book value at any date, as well as particulars of such 
repairs, renewals and replacements as may have been effected. 

A Plant Ledger is therefore necessary in the following or some 
similar form — 

Description of Plant ^ 

Date purchased 

From whom purchased 

Invoice No 



Cost .... 
Estimated residual value . 
„ total depreciation 
life . 
Annual provision 



i s. d. 



Cost 

Actual residual value 

„ total depreciation 

„ provision 
Shortage 
Surplus 



i s.d. 



Date. 



Capital. 



Repairs, etc. 



Wages. 



Materials. 



Date. 



Depre- 
ciation. 



Profit and 

Loss 
(Repairs, 

etc.). 



Balance 
(memo.). 



It will be observed that the particulars stated at the head of 
the Ledger accounts wiU give a record, first, of the estimates made, 
second, of the facts, and thus furnish a convenient comparison. 

The amounts set out under the heading of Repairs and Renewals 
are entered for purposes of record only, and do not enter into the 
reconciliation of the Plant Ledger with the balance of Plant Account 
as contained in the General Ledger. 

The total of the normal allowances for depreciation as entered 
in the Plant Ledger, together with any shortage or surplus appear- 
ing in the total depreciation provision in respect of any item of 
plant upon realisation of residual value, forms the charge to revenue, 
which is entered in the ordinary way to the credit of Plant Account 
in the General Ledger and the debit of Profit and Loss Account. 

In practice, it is not unusual to find that a Depreciation Reserve 
is created and an account opened therefor ^t the back of the 



256 ACCOUNTING 

Plant Ledger. Thus, suppose the allowances upon the various 
accounts to amount to £7,603, and suppose further that shortages 
upon estimates in respect of plant scrapped during the financial 
year amount to £125. The total of £7,718 would represent the 
depreciation upon plant as a whole. It may be thought desirable, 
however, to credit Plant Account with (say) £8,000, and to construct 
a Depreciation Reserve Account, which will be opened in the 
Plant Ledger and credited with £282. The Reserve so made may 
be used in later years to meet abnormal losses upon realisation of 
any item of plant arising by reason of inaccurate estimate in 
time past. 

It will be observed that the creation of a Depreciation Reserve 
in this manner does not interfere with the reconciliation of the 
Plant Ledger with the balance of Plant Account as contained in 
the General Ledger. 

Where plant and machinery consists of many assets, diversified 
in character and valuable in total, it is important that an accurate 
record of depreciation and of the value of any particular item of 
plant be kept, and for this purpose some such system as that 
described is essential. 



CHAPTER XIX 

RESERVES AND RESERVE FUNDS AND SINKING FUNDS 

Some difference of opinion obtains as to the precise characteristics 
impHed by the terms Reserve and Reserve Fund. It is clear that 
a difference in principle exists as between the provision made in 
respect of an accrued loss of uncertain amount, the charge for 
which is a necessary preliminary to the ascertainment of net profit, 
and the appropriation, from the balance of profits as accurately 
determined, of a sum for a general or defined purpose which would 
otherwise be available for division. 

The former constitute specific reserves, such, for example, as a 
Reserve for Bad Debts, a Depreciation Fund, and (in certain cases) 
a Sinking Fund; in respect of these, the purpose of each will as 
a rule be precisely indicated. The latter are general reserves, 
represented by some part of the assets of the business, but perhaps 
not specifically represented by particular assets. In regard to 
general reserves, one view is that these are to be termed Reserves 
when represented by the general assets, and Reserve Funds when 
specifically invested, while specific reserves should in all circum- 
stances be exactly described. The alternative view limits the use 
of the word Reserve to the case of those made as specific provision 
for accrued loss, and applies the term Reserve Fund to any pro- 
vision made by way of appropriation from, and not as a charge 
against, profits. The adherents of the latter view regard the 
question of investment or non-investment of cash equal to the 
amount reserved as being merely a question of policy, the invest- 
ment as being part of the assets of the concern, and the fact of 
investment or non-investment being without effect on the nature 
of the original appropriation from profits. 

It is proposed to consider shortly the general nature of Reserves 
and Reserve Funds as found more particularly in connection with 
the accounts of limited companies. 

The ordinary forms of specific Reserves, such as a Reserve for 
Bad Debts and similar provisions for the estimated amount of 
losses suffered, require Uttle explanation. Their creation constitutes 

257 



258 ACCOUNTING 

a provision for loss and is essential to a true statement of the 
financial position. Their amount must at the best be largely a 
matter of estimate, and to the extent to which they exceed the 
loss anticipated, they become general, rather than specific, reserves. 
The uses of a Depreciation Fund have been considered elsewhere. 
It has been stated that the amount of profits appropriated as a 
reserve for general purposes may be represented by assets specifi- 
cally identified as attributable to the Reserve Fund and acquired 
by the investment of cash to an amount equal to the profits 
reserved, or may exist merely in the greater value of assets as 
compared with liabilities, including capital, which is produced by 
the non-distribution of the portion of the gains so reserved from 
distribution. The determination of the form of the assets repre- 
senting the Reserve Fund is primarily, in the case of a limited 
company, a matter for the directors to decide in accordance with the 
circumstances, or which may be governed by the Articles of Associa- 
tion. When the nature of the business is such as to necessitate 
expenditure in permanent form on fixed assets, buildings, plant and 
machinery and the like, for the purposes of manufacturing opera- 
tions and the reproduction of value thereby, the amount of the 
profits reserved may in many cases be used to the greatest advantage 
as additional working capital. The arguments for its investment 
" outside " the business, in assets free from the immediate influences 
upon the fortunes of the concern, are in such instances less strong 
than where (as with banks, for example) the business operations 
are wholly financial in character and involve the continual liquida- 
tion of liabilities, independently of trade fluctuations, as they 
mature. In the latter case, it is obviously desirable that there 
should be assets in such form that, in times of stress, realisation 
can take place without risk of loss from those causes which have 
directly contributed to the financial strain upon the business. 
This, no doubt, would in every case be an advantage, but particu- 
larly so where the business is such as derives its profits from the 
facilities provided by it in assisting the credit and financial operations 
of its customers. 

^Summarising the points set out, the question of the form of the 
assets representing the Reserve Fund is a matter to be determined 
by the circumstances. If it is established to provide funds, to be 
atvailable in all emergencies, it is desirable that it should be invested 



RESERVES AND RESERVE FUNDS AND SINKING FUNDS 259 

in assets readily realisable " outside " the business, but if, on the other 
hand, the object in creating the Reserve is that of providing 
additional working capital and generally of strengthening the 
business itself in its ability to carry out and extend its ordinary 
trading operations, it may appear that the funds are employed 
to best advantage as part of the general assets. A Reserve (or 
Reserve Fund) so used may ultimately prove so necessary to the 
conduct of the business that, although divisible, it could not be 
realised without detriment to the concern. Under such circum- 
stances, it may, as explained in the chapter on Company Accounts, 
give reason for capitalisation of the Reserve. 

Sinking Funds. 

The purposes and characteristics of Sinking Funds demand 
consideration. Their primary purpose is the provision of funds, 
usually at some definite date. Where there is risk that investment 
in the general assets will render it difficult to have the required 
amount available when needed, the Sinking Fund will, as a rule, 
be specifically invested. Such funds are created by a transfer 
from the debit of Profit and Loss Account to the credit of the Sink- 
ing Fund of the sums desired, thus reducing the balance of profits 
available for division. All Sinking Funds are specific in that they 
are created for a definite purpose. This purpose may be such 
that the Sinking Fund provision forms a definite charge on profits 
in the sense that net profits are not truly ascertained until the 
charge has been made, or may in effect (even though the provision or 
charge be made under agreement) represent rather an appropriation 
of profits otherwise divisible. 

A Sinking Fund, being created to provide funds, commonly 
renders the funds provided available for one or other of two main 
purposes, [a) the renewal of an asset, {h) the extinction of a liability. 
The application of assets for the purposes named does not of itself 
alter the true value of the surplus of assets over liabilities, but this 
is directly affected by the reservation or transfer from profits. 

The matter may be illustrated by the Balance Sheets as shown 
on the next page. 

In I, the Sinking Fund, created by a charge against Profit and Loss 
Account, serves the purposes of a Depreciation Fund. The Lease 
can be written off against the credit balance, the Sinking Fund 



260 



ACCOUNTING 



investment realised (assumed as producing £10,000), and the 
proceeds applied in renewal of the expired lease. 



I. The Use of a Sinking Fund Created with a View to 
Renewal of a Lease. 

(a) Balance Sheet prior to realisation of Sinking Fund assets. 

£ 

60.000 
40,000 



Capital 

Sundry Liabilities . 

Sinking Fund 



10,000 



110.000 



Sundry Assets 
Lease, at cost 
Sinking Fund Investment: 
Consols 



£ 
90,000 
10,000 



10,000 



110,000 



(&) Balance Sheet subsequent to realisation of Sinking Fund 
Investment and application of proceeds. 



Capital 

Sundry Liabilities 



£ 
60,000 
40.000 



100.000 



Sundry Assets 

Lease (renewed, at cost) 



£ 

90.000 
10,000 



100,000 



Note. — If the object in view had not been the provision of funds at a 
definite date {i.e., the expiration of the lease) there might have been no 
advantage in creating distinctive investments against the amount reserved. 
Should it, for example, have been inexpedient or impossible to renew the 
lease, or to acquire another, it might have been preferable to permit the 
amount of the annual depreciation to be charged against Profit and Loss 
Account and to be absorbed year by year into the general assets without 
distinction. 

II. The Use of a Sinking Fund, Created for the Purpose 

OF Providing Funds to be Applied in Extinction of a 

Liability (Debentures). 

{a) Balance Sheet at maturity of debt. 



Capital 
Debentures . 
Sundry Liabilities . 
Sinking Fund 



£ 
50.000 
20,000 
40.000 
20,000 



Sundry Assets 
Sinking Fund Investment: 
Consols 



£ 

110,000 
20,000 



130,000 



(6) Balance Sheet after redemption of liability (assuming 
realisation of Sinking Fund Investment at cost) 

£ £ 

50,000 Sundry Assets . . 110,000 

40.000 



Capital 

Sundry Liabilities 

Sinking Fund 



1 10.000 



RESERVES AND RESERVE FUNDS AND SINKING FUNDS 261 

In the second illustration, upon the fulfilment of the object for 
which the Sinking Fund has been created, the credit balance, 
£20,000, will represent a general reserve, assuming the value of the 
assets to be fairly stated. If this is not the case, as in Illustration 
I {a), the Sinking Fund may be regarded, in whole or in part, as a 
provision for depreciation. 

A Sinking Fund may thus be of two-fold nature. It is con- 
structed by a charge against profits and has for its object in every 
case the provision of funds. Should the Sinking Fund charge be 
in addition to the fair charge in respect of depreciation, it is a 
general reserve; but should it, in whole or in part, represent or 
otherwise cover a provision of this nature, so that its charge against 
revenue is essential in determining the net profits, it wiU, in whole 
or in part, constitute in effect a Depreciation Fund. 

A Sinking Fund usually, but not invariably, accumulates at 
interest, this being the amount actually earned by the Sinking 
Fund investments, or the fixed rate computed upon the credit 
balance and contributed, together with the nominal charge, from 
Profit and Loss Account. There is, however, nothing inconsistent 
with the objects of a fund of this nature in the immediate applica- 
tion of the annual or periodical instalments to the purposes for 
which they are provided. 

Thus, debentures may be required to be cancelled by the opera- 
tion of a Sinking Fund. The principal amount of the debt may 
mature at a definite future date, carrying interest in the meantime, 
and the Sinking Fund be so built up and invested as, with interest 
earned, to accumulate to the desired figure at the required time. 
On the other hand, it may be permissible, or even obligatory, to 
apply each annual instalment in redemption of a part of the debt 
as the instalment accrues due. In these circumstances, there may 
be no Sinking Fund investments, and no interest, but the interest 
payable will gradually be reduced as the debt is cancelled. 

These remarks, given in general illustration, must not be taken 
as necessarily to imply an option to the borrower as to the method 
and time of redemption of debentures. This will be determined by 
agreement between the lenders and the company. The provisions 
of such agreements may simply require repayment at a definite date 
and may contain no restriction against the company borrowing 
elsewhere, subject to its not infringing its agreement, e.g., by 



262 



ACCOUNTING 



mortgaging property already charged or in other ways, to repay 
the debentures; but, on the other hand, the terms may require 
redemption year by year of an agreed part of the principal, and 
possibly require this to be made " out of profits." 

Illustration. — ^A Limited Company issues debentures to the 
amount of £100,000 at a discount of 10 per cent., upon terms inter 
alia of their redemption out of profits at the rate of £10,000 
(nominal) in each year; redemption to be made either by drawings 
at the price of 105 or by purchases in open market. 

In the circumstances stated, the Debentures Account will be 
credited from the opening entries with £100,000 and Discount on 
Debentures Account debited with £10,000. 

Assume that the redemption of £10,000 (nominal value) of the 
debentures costs in successive years: £9,750, £9,850, £10,620, 
£10,500. These sums are the amounts of the contributions to be 
made in successive years from Profit and Loss Account. The 
following Journal entries illustrate the treatment in accounts at 
the end of the first year of the transactions referred to — 





£ 


£ 


Profit and Loss Account . . . .Dr. 


9,750 




To Sinking Fund 




9,750 


Amount required to cancel ;^ 10,000 of Debentures 






redeemed during the year. 






Debentures Account Dr. 


10,000 




To Sundries — 






Sinking Fund 




250 


*Cash 




9,750 


Transfer from first-named account of nominal value 






of debentures redeemed during the year at a cost 






of ;^9,750. 







An alternative and more direct method of treatment would be 
as follows — 

£ 



Dr. 



Profit and Loss Account 

♦ To Cash . . . . 

For cost of redemption of ;^10,000 nominal value of 
Debentures during the year. 



9,750 



£ 

9,750 



Debentures Account ..... Dr. 10,000 

To Sinking Fund 10,000 

For nominal value of debentures redeemed during the 
year. 

* The entries relating to cash transactions would in practice appear in 
the Cash Book and be posted direct therefrom, but possibly in the first place 
to a Debentures Cancelled Account, the balance of which, ;^9,750, would be 
transferred to Profit and Loss Account. 



RESERVES AND RESERVE FUNDS AND SINKING FUNDS 



263 



It will be observed that the foregoing example has proceeded 
oA the basis that each year bears the actual cost of redemption 
incurred in that year, and that the charge is not equalised over 
the whole period. This is the usual method of treatment where 
an equal proportion of debt is redeemable each year. 

The illustration has not dealt with the Discount on Debentures 
Account. This, in ordinary circumstances, would be written off 
to Profit and Loss Account over the period of ten years for which 
the debt is outstanding, but, in the particular case under con- 
sideration, the latter account has already borne the full cost of 
redemption of the principal sum. It is fair, therefore, and usually 
not inconsistent with the terms of redemption agreed upon, to. 
regard the provision as inclusive of the discount allowed upon the 
original issue. Discount on Debentures Account would then be 
written off, as to one-tenth each year, against the Sinking Fund, 
thus — 

i 
Sinking Fund Br. 1,000 

To Discount on Debentures Account . . . 1,000 

For amount of discount on issue of ;^10,000 Debentures 

redeemed during year. 



It is obvious that by this latter method the ultimate total of 
the Sinking Fund wiU be £90,000, but that if the Discount on 
Debentures Account be written off to Profit and Loss, it will amount 
to £100,000. 

Upon the facts stated, the Balance Sheet of the company at the 
end of the fourth year will appear in respect of the matters referred 
to as follows — 



Liabilities. 
Debentures . . . . 
Less, amount cancelled 

Sinking Fund 

Profit & Loss Account, bal- 
ance to credit . 

Less, cost of redemption of 
£10,000 Debentures . 



Less, interim dividend paid 



100,000 
40,000 


£ 

60,000 
36,000 

30,850 


57,350 
10,500 


46,850 
16,000 



Assets. 
Discount on Debentures as 

per last accoimt 
Less, proportion charged to 

Sinking Fund . 



7,000 
1,000 



6,000 



The redemption of debentures to a stated amount year by year 
is usual where the capital assets of the company forming the chief 
security for the debenture holders are of a wasting nature, or are 
being exhausted by the ordinary operations of the business, as in 



264 



ACCOUNTING 



the case of nitrate-producing companies, mining concerns, and the 
Hke. 

A Sinking Fund is in such circumstances commonly regarded as 
equivalent to a provision for depreciation in respect of the capital 
assets, and therefore deducted from the latter in the Balance Sheet 
of the company. 

The calculation of the annual instalment required for a cumula- 
tive Sinking Fund introduces the factor of interest. Should the 
instalments when invested cease to produce the rate of interest 
assumed, the full principal sum required will not be provided at 
the necessary date. The reaUsation of Sinking Fund investments 
and the use of the proceeds to cancel a part of the loan debt inter- 
feres with the accumulation of the Fund to the extent of the cumu- 
lative interest upon the amount realised. In such circumstances, 
an adjustment must be made by a contribution from profits equal 
to the amount of interest that is required to maintain the Sinking 
Fund on the basis of the original calculation. The point is illustrated 
in the example that follows — 



Illustration of the Working of a Sinking Fund of a Local 
Authority. 



1915. 
Dec. 31 



1916. 
Dec. 31 



1917 
June 30 



Revenue Account . . . Dr. 

To Sinking Fund .... 
Annual instalment on 2\ % Table 

required to repay ;^ 1.000,000 at end 

of thirty years at par. 
Sinking Fund Investment . . Dr. 

To Cash . 
Investment of annual instalment. 
Sundries ..... Dr. 

To Sinking Fund 
Interest Account 
Amount received during year on sums in- 
vested, bearing interest at average rate 

of 3 %, less tax (ignored). 
Revenue Account, annual instalment . 
Sinking Fund Investments . • . Dr. 

To Cash 

Investment of annual instalment and 

interest accumulations. 
Cash Dr. 

To Sinking Fund Investments , 
Amount realised this date 
Sinking Fund .... Dr. 

To Cash 

Amount applied in redemption of ;^30,000 

Stock @ 93 %. i 



I 
22.777 



22.777 



683 



22.777 
23.460 



27.900 
27.900 



£ 

22,777 



22,777 
23.460 



23,460 

27,900 
27.900 



RESERVES AND RESERVE FUNDS AND SINKING FUNDS 



265 



1917. I 
June 30 Loan Capital Account 

To Cancelled Stock Account 
Nominal value of Stock redeemed. 



Dec. 31 



Dr. 



Dr. 



Sundries — 

To Sinking Fund . . . . I 

Interest Account . . . .j 

Amount received on Sinking Fund 
Investments during year (assumed at 
average of 3 %) : 

Half-year to 30/6/17— 

3 % on ;^46,237 6s. 3d. ;^693 1 1 2 
Half-year to 3 1/1 2/17— 
3 % on ;^18,337 6s. 3d. 275 1 2 



;^968 12 4 



Revenue Account 

Annual instalment . £12,111 - 
Interest @ 2^- % on sums 

withdrawn, ;^27,900 ; 

for half-year . 348 15 



Sinking Fund Investments . . Dr. 

To Cash ...... 

Investment of annual instalment and 
interest. 



i 
30.000 



968 



23,125 



24,094 



12 



15 



30,000 - 



24,094 



24.094 



Notes. — Entries affecting Cash would appear only in the Cash Book, 
and are shown as above for convenience in illustration. The example has 
disregarded the effect upon the Sinking Fund of — 

(1) The loss of interest arising from non-investment of small balances; 

(2) Expenses of realisation and investment; 

(3) Income Tax deductions from interest; 

(4) Loss on realisation of investments. 

These amounts are covered, wholly or in part, by the earning of a rate of 
interest above that necessary on an exact scale according to annuity tables, 
and the redemption of debt below par. 



The matter set out has illustrated the ordinary form of a cumu- 
lative Sinking Fund. While there is no difficulty in creating a 
non-cumulative fund, setting aside periodically an amount equal 
to a stated proportion of the principal sum required, without 
allowance for the interest to be earned upon the investments made 
against the sum reserved, and treating such interest as an ordinary 
item of revenue, the non-cumulative form of fund is usually pro- 
vided in cases where the instalments are immediately applicable, 
as, for instance, in the redemption of debt at annual intervals. 
It has been noted that the effect of such redemption is to reduce 
the charge for interest upon the loan, and thus to compensate to 

18— (1377) 20 pp. 



266 



ACCOUNTING 



some extent for the loss of interest otherwise receivable upon 
invested instalments. 

In some cases, as, for example, in regard to the loans made by 
the Public Works Loans Commissioners to local authorities, the 
annuity form of Sinking Fund is used. Under this method, which 
is illustrated herewith and which in principle is identical with the 
system of providing for depreciation described on page 253, repay- 
ment is made of a specific amount year by year. The amount is 
so calculated as to operate in reduction of principal and interest 
on principal from time to time outstanding, so that the last pay- 
ment discharges the balance of principal owing with the interest 
accrued thereon. 



Illustration : Loan £8,000, Repaid with 4% Interest, Over a Period 
OF 12 Years, by an Annual Instalment of £852 : 8 : 8. 

LOAN ACCOUNT. 



1913. 
Dec 31 


To Cash . . . . 
„ Balance carried down . 

To Cash . . . . 
„ Balance carried down . 


£ 

852 

7,467 


s. 
8 
11 


d. 
8 
4 


1913 
Jan 1 
Dec 31 

1913. 
Dec. 31 

1914. 
Dec. 31 

1914. 
Dec. 31 


By Cash .... 
„ Revenue A/c, Interest . 

By Balance brought down . 
„ Revenue A/c, Interest . 

By Balance brought down . 


8,000 
320 

8,320 


— 


d 




8,320 


- 




- 


1914 
Dec. 31 


852 
6,913 


8 
16 


8 
8 


7,467 
298 


16 


4 




7,766 


5 


4 


7,766 


4 






6,913 


8 



In the last year, the credit balance of capital outstanding will 
be such as will, with interest at the rate of 4 per cent, per annum, 
amount to £852 8s. 8d. 



CHAPTER XX 
MISCELLANEOUS 

Deferred Interest Problems. 

In cases of purchases and sales of goods upon a system of deferred 
payment, the proper treatment of the portion of the total sum and 
periodical payments attributable as interest is of importance. 

Thus, a dealer in pianos may sell an article at a price payable 
by equal quarterly instalments over a period of years. The price 
will naturally be in excess of that for a cash transaction, and the 
factor of interest necessarily enters into it. The latter, however, 
is in decreasing ratio year by year, for each successive instalment 
reduces the balance of " principal " (as the cash sale price may be 
termed) outstanding. 

The problem indicated may be dealt with in various ways, which 
it is proposed to illustrate by example. 

I. Example. A Colliery Company acquires 40 wagons, of cash 
sale value of £60 each, upon terms of hire purchase involving 
payment of seven annual instalments of £429 18s. lid. each, 
inclusive of interest. 

The total sum payable is thus £3,009 12s. 5d., of which £609 
12s. 5d. represents interest. It is ascertained upon inquiry from 
the Wagon Company that interest has been allowed for at the 
rate of 6 % per annum upon the diminishing balance of the capital 
value outstanding year by year. 

It is desirable to note the following points — 

(1) Each instalment represents a payment on account of : 
Principal, of gradually increasing amount, and of 
Interest, of gradually decreasing amount. 

(2) The purchaser is under an immediate liability in each year 
of £429 18s. lid., and not of the balance of the whole amount 
eventually payable if the contract is performed. 

(3) As the purchaser eventually acquires the full ownership, he 
must from the date of purchase allow for depreciation on the full 
** cash value." 

267 



268 



ACCOUNTING 



(4) The vendor generally has the right to retake possession of the 
subject matter in the event of failure to pay any instalment due. 

From the point of view of the vendor there is usually sufficient 
value in the subject-matter when retaken by him to cover the 
proportion of " cash sale value " outstanding. This, however, 
may not be so in the earlier years of repayment, but as lapses are 
infrequent in this period, the risk of loss from bad debts is not 
great. 

(5) There may be an obligation or covenant on the part of the 
vendor to maintain the subject-matter in a proper state of repair 
for a period of years, for which some provision may be required 
in his accounts. This, however, is independent of the question of 
treatment of deferred interest. 

The pro forma accounts submitted illustrate the treatment in 
the books of the purchaser of the transactions referred to. 



WAGONS ACCOUNT. 



Dr. 



1913. 
Jan. 1 



1919. 
Dec 31 



To Wagon Co., Suspense 
Account . 



To Balance brought down 



2,400 


s. 


d. 


1913. 
Dec. 31 

1914. 
Dec. 31 

1915. 
Dec. 31 

1916. 
Dec. 31 

1917. 
Dec. 31 

1918. 
Dec. 31 

1919. 
Dec. 31 


B 


2,400 


- 


- 




1,560 


_ 







By Profit & Loss A/c— 
Deprec'n at 5 % p.a. 



Do. 
Do. 
Do. 
Do. 
Do. 



do. 
do. 
do. 
do. 
do. 



do. 
do. 
do. 
do. 
do. 



Do. do. do. 
Balance carried down 



£ 


5. 


120 


- 


120 


- 


120 


- 


120 


- 


120 


- 


120 


- 


120 
1,560 


- 


2,400 







WAGON CO., SUSPENSE ACCOUNT. 



1913. 
Dec 31 


To Wagon Co. 
„ Balance 

To Wagon Co. 
„ Balance 


2,114 


s. 
18 

1 


'd. 

11 

1 

% 


1913. 
Dec. 31 

1913. 
Dec 31 

1914. 
Dec. 31 


By Wagons A/c 
„ Profit & Loss A/c, In- 
terest at 6 % p.a. . 

„ Balance 

„ Profit & Loss A/c, In- 
terest at 6 % p.a. . 


2,400 
144 


s. 


d. 




2,544 


2,544 

2,114 

126 
2.240 


1 

16 
18 


- 


1914. 

Dec. 31 

» 


429 
1,810 


18 
19 


11 
1 


11 




2,240 


H 




^ 



1915. 
Dec. 31 



1916. 
Dec. 31 



1917. 
Dec. 31 



1918. 
Dec. 31 



1919. 
Dec. 31 



To Wagon Co. 
„ Balance 



To Wagon Co. 
„ Balance 



To Wagon Co. 
„ Balance 



To Wagon Co. 
„ Balance 



To Wagon Co. 



MISCELLANEOUS 

WAGON CO., SUSPENSE ACCOUNT— (coKid.) 
1914. 



269 

Cr. 



\ i 


s. 


d.\ 


42911811 


' 1,489 13 4 

1 


l,919jl2J 3 


T 


429il8ill 


1,149 


2 




1,579 


- 


11 


429 


18 


11 


788 


2 




1,218 


_ 


11 






„ 


429 


18 


11 


405 


8 


10 


835 


7 


9 


429 


18 


11 


429 


18 


11 



Dec. 31 

1915. 

Dec. 31 



1915. 
Dec. 31 

1916. 
Dec. 31 



1916. 
Dec. 31 

1917. 
Dec. 31 



1917. 
Dec. 31 

1918. 
Dec, 31 



1918. 
Dec. 31 

1919, 
Dec. 31 



By Balance 

„ Profit & Loss A/c — In- 
terest at 6 % p.a. , 



Balance 

Profit & Loss A/c, In- 
terest at 6% p.a. 



Balance 

Profit & Loss A/c, In- 
terest at 6 % p,a. . 



Balance 

Profit & Loss A/c, In- 
terest at 6 % p.a. 



Balance 

Profit & Loss A/c, In- 
terest at 6 % p.a, (say) 



1,810 


i. 

19 


i 

1 


108 


13 
12 


2 


1,919 


3 


1,489 


13 


4 


89 


7 


7 


k 1,579 


_ 

- 


11 


1,149 


2 


- 


68 


18 


11 


1,218 


11 


788 


2 


- 


47 


5 


9 


835 


7 


9 


405 


8 


10 


24 
429 


10 
18 


11 



WAGON CO. 



1913, 
Dec. 31 


To Cash . . . . 

»» Ff • 


L 


s. 
18 


d. 


1913. 
Dec. 31 

1914. 
Dec. 31 

1915. 
Dec. 31 

1916. 
Dec. 31 

1917. 
Dec. 31 

1918. 
Dec. 31 

1919. 
Dec. 31 


By Wagon Co. Suspense A/c 
f tt >i » II 


i 
429 


I. 


d. 


1914. 
Dec. 31 


429 


18 




429 


18 




1915. 
Dec. 31 


429 


18 




429 


18 
18 




1916. 
Dec. 31 


429 


18 


- 


429 




1917. 
Dec. 31 


429 


18 


429 


18 




1918. 
Dec. 31 


429 
429 


18 




429 


18 




1919. 
Dec. 31 


429 


18 





Note. — The illustration as set out records both the value of the wagons, 
free from charge, but reduced by depreciation, and the " contingent " amount 
of indebtedness in respect of the capital value for future discharge. The 
value of the equity in the asset at any date is represented by the balance of 
Wagons Account, less that upon Wagon Co., Suspense Account. 

In the books of the vendor-hirer, the method of accounting will be similar. 
It will be necessary to have regard, however, to the liability (if any) to repair, 
for which provision may be necessary out of profits, and to the risk of possible 



270 



ACCOUNTING 



loss from bad debts. It has been pointed out that, in respect of the latter, 
the value of the wagons, of which possession may generally be retaken in the 
event of default of payment of any instalment, will after the first few years 
usually be found to exceed the capital value outstanding, while the probability 
of default in the earlier instalments is not so great as for later payments. 

It will be observed that the transactions relating to the discharge of a 
liability by equal annual instalments representing both interest and capital 
present some analogy in treatment with the annuity system of depreciation. 

II. The method illustrated has the merit of an exact appor- 
tionment of the transactions from the point of view of the purchaser, 
as between interest, depreciation, and the equity acquired, and 
from that of the vendor, as between gross profit and deferred 
interest. In the alternative system now described, which is 
applicable only in the books of the vendor, both gross profit and 
interest are taken to be earned evenly over the whole period of 
repayment. 

Example. A piano, cost price £120, is sold for £192, on terms 
of hire purchase, involving repayments of £4 per month for 48 
months. 

The following is the account in the Hire Ledger of the purchaser 
for the first 12 months — 



Dr 



JOSEPH JOHNSTON, 10 LIMED ALE ROAD, LIVERPOOL. 

Dagmar Grand, Stock No. , etc., etc. {full 

description), sold under Hire Purchase Agreement 
Nod. , for ;^192, monthly instalments of £A, 



1918. 
Jan. 31 
Feb. 28 
Mar. 31 
Apr. 30 
May 31 
June 30 
July 31 
Aug. 31 
Sept. 30 
Oct. 31 
Nov. 30 
Dec. 31 

1919. 

Jan. 31 

etc. 







1 




s. 


d. 


1918. 








i 


s. 


To Instalment due 




- 


- 


Jan. 28 
Mar. 2 


By Cash 




- 


1 




_ 


— 




. . 




_ 


„ 


, 


, 




- 


- 


Apr. 4 






> 




- 


„ 


, 


, 




— 


— 


May 20 






» 




- 


,j 


J 


J 




— 


_ 


June 6 










- 


„ 


, 


, 




- 


- 


July 18 






\ 




- 


,, 


, 


^ 




— 


— 


Aug. 12 










- 


„ 


, 


, 




- 


- 


Sept. 24 










- 


,, 


^ 


J 




- 


— 


Nov. 2 






» 




- 


^^ 








_ 


_ 


Dec. 4 










_ 


,',' 


\ 






- 


- 










" 


. 


i 




- 


- 










" 


' 


' 


4 


- 


- 















For the purposes of illustration, the general features of the system 
of accounts in relation to transactions of sale on hire-purchase 
terms must be considered. 

The form of an individual debtor's account is illustrated by the 
example given. The method of record consists, so far as the system 



MISCELLANEOUS 271 

of book-keeping is concerned, in a debit to the purchaser's account, 
year by year, of the total of the instalments due in respect of each 
year, with a corresponding credit to a Hire Sales Account. The 
credits upon the accounts of debtors will be made by posting from 
the Cash Book in the usual manner. 

There is thus no immediate debit of the full sale price, and the 
particulars at the head of the Ledger accounts will be adapted as 
may be necessary to ensure correctness of entry of debits when made. 

Hire Sales Account will appear in the General Ledger. To this 
account will be charged the stock value of pianos sold on hire- 
purchase (by transfer from Pianos Trading Account), while it will 
be credited year by year with " sales," which are for this purpose 
taken to be the instalments due in the year under review. 

In the event of default in payment of instalments due, the vendors 
may resume possession of the subject-matter of sale. In such cir- 
cumstances, the purchaser usually forfeits any cash paid, but the 
right, if any, to recover unpaid instalments due or to become due 
is in practice abandoned. The resumption of possession, indeed, 
is usually profitable, from the fact of forfeiture by the purchaser 
of past payments. In the books of account, the hirer's account 
will stand debited with instalments for the year ; payments received 
may cancel a portion ; the balance will be transferred to the debit 
of Hire Sales Account. 

The resumption of possession will imply a retransfer of the 
stock values (revised if necessary) from Hire Sales Account to 
Pianos Trading Account. 

From the foregoing, it will be seen that the aim of this method 
is to show as profit the difference between the " sales," i.e., instal- 
ments attributable to the year, and the proportionate part of the 
cost of the pianos assumed to have passed to the purchaser. 

Thus, in the illustration submitted, the piano is sold on 1st 
January, 1918. At 31st December, 1918, the stock valuation is 
the proportion of the cost, £120, borne by the instalments unaccrued 
to the total sale price, in this case tM of £120. 

At the end of each financial year, a valuation of the whole of the 
stock sold on hire-purchase terms and not fully paid for will be 
necessary. This valuation will disclose the profit on Hire Sales 
Account, while the balances of the debtors' accounts will show the 
arrears. 



272 



ACCOUNTING 



Under the method described, gross profit on trading and interest 
on deferred instalments are dealt with together, and it is assumed 
that the profit is earned evenly over the period. This is perhaps 
not so sound in theory as the earher method illustrated, but it 
will be found on examination that it has the effect of deferring 
somewhat the crediting of profit to the Profit and Loss Account, 
and is therefore to be commended on the ground of prudence. 



Dr. 



HIRE SALES ACCOUNT. 



Cr. 



1917. 
Dec. 31 

1918. 
Dec. 31 



1918. 
Dec. 31 



To Balance, value of stock 

„ Kanos A/c, stock valua 
tion of pianos sold on 
hire purchase during 
the year , 

„ Sundry Persons, bal- 
ance of instalments 
debited, irrecoverable 

„ Profit & Loss A/c, 
profit for year . 



Balance, value of stock 



3,562 

1,586 

132 
859 


s. 


d. 


1918. 
Dec. 31 


6,139 


3,850 


- 


- 



By Sundry Persons, instal- 
ments receivable in 
respect of the year . 

Pianos A/c, value of 
pianos returned. 

Balance, value of stock 



1,825 



464 
3,850 



Both methods so far dealt with have proceeded on a precise 
examination of the facts in regard to each transaction. This has 
been necessary, as substantial value is concerned in each case, but 
may be inadvisable, and perhaps impossible, in other circumstances, 
where sales are of small amount, are numerous, and are made upon 
uniform terms as to period, amount of instalments, rate of interest, 
etc., etc. 

Where these facts apply, the following method may be found 
of advantage — 

III. Each sale, when entered in the Sales Day Book, is analysed 
as between Ordinary Sale Price, and Interest, columns for Total 
Amount and the other headings being provided. 

The gross amount is debited to the purchaser, whose account is 
credited with repayments in the ordinary way. 

Under this system, ordinary gross profit and deferred interest 
are distinguished; the former is treated as earned at time of sale, 
the latter is carried to a Deferred Interest Account (the interest 
on each year's sales being kept distinct), and credited to Profit and 
Loss Account year by year as earned. 

It has been stated that terms of sale are uniform as to rate of 
interest, period of payment, etc. It therefore becomes possible 
to ascertain the percentage of total interest attributable to each 



MISCELLANEOUS 



273 



year over which instalments are payable. Thus, in respect of the 
illustration applicable to Wagon Hire Purchase (p. 267) the 
interest is — 

I 5. d. 

First year 



Second 



s, 
144 - 
126 16 



Etc. 



and these figures may be expressed in percentages of the total 
interest, £609 12s. 5d. In respect of this illustration, an alternative 
method would be possible, by debiting the purchaser originally 
with £3,009 12s. 5d. (crediting each repayment as received), credit- 
ing Sales Account, £2,400, and Deferred Interest (1913) Account 
with £609 12s. 5d. The latter account would be absorbed by 
transfer to Profit and Loss Account of the percentage of interest 
earned each year. 

This system is open to objection in that it records as a debt 
an amount representing instalments not immediately receivable ; 
it has, however, in some circumstances, advantages of convenience 
and simplicity. 

The method under consideration will operate on lines similar to 
that in the theoretical illustration just submitted in respect of 
which, as a fact, the value and importance of the transaction 
require more detailed treatment. 

Assume for consideration the case of a business dealing in 
gramophones, of values from £5 to £35. Assume further that 
such as are sold on hire-purchase terms are upon an exactly similar 
basis as regards period of payment and rate of interest. All that 
is then necessary to apportion accurately the amount at credit 
of the various accounts open for Deferred Interest is to obtain 
the average due date of the sales in each year. 

Reverting 
as follows — 



to the 


illustration already 


cons 


jidered. 


interest falls 


1913 24% 




1914 












21% 




1915 












18% 




1916 












15% 




1917 












H % 




1918 












7% 




1919 












4% 





Deferred Interest Account could be cleared year by year by 
transfer of the percentages stated. 

18b— (1377) 



274 



ACCOUNTING 



But in this illustration, the sale was made on 1st January, 1913, 
and, when dealing with many transactions in total taking place 
throughout the year, it will be incorrect to give to each year the 
percentages as shown. An average due date must be ascertained. 
Assume that this is calculated and fixed as 30th June. The 
following would then be the correct percentages to apply in making 
the transfers year by year from Deferred Interest (1913) Account — 



1913 






. 12% 


1914 






12 % + m % 


1915 






m % + 9 % 


1916 






9 % + n % 


1917 






7i % + H % 


1918 






. 5i%+ 3^0/^ 


1919 






3i % + 2 0/^ 


1920 






. . . 2% 



Where repayments entered over seven years, there will be eight 
accounts for Deferred Interest open at any one time. Thus, in 
the year 1917, Profit and Loss Account will be credited with— 

12 % of Deferred Interest on 1917 Sales 



22i % 

m % 



1916 
1915 



Etc, etc. 



Upon the assumption that the average due date remains constant 
each year. 

The practical illustration of this method has been given in 
relation to transactions already dealt with, with the object of greater 
clearness. It has been stated, however, that the actual illustration 
is not in itself one to which it is desirable that this method be 
applied. It is applicable where the values of sales are small, repay- 
ments frequent, and transactions numerous. For example: a 
gramophone, saleable for cash at £24, is sold for £30, on hire pur- 
chase, on terms involving quarterly payments of £2 lOs. each 
over a period of 3 years. To these facts, the system first described 
is unsuited by reason of the detail involved, and one or other of the 
remaining two is preferable. 

A note in explanation of the method of calculation of average 
due date may be of interest. Assume sales as given in the following 
table. 





MISCELLANEOUS 


i 


January 3,200 


February 








. 4.100 


March . 








. 5.000 


April 








. 4,800 


May, . 








. 6.200 


June 








. 2,300 


July . 








. 2.600 


August . 








. 1,800 


September 








. 4,200 


October 








. 5,200 


November 








. 6,000 


December 








. 6,300 



275 



51,700 



For purposes of approximation, monthly sales are assumed to 
be *' equated " as at 15th of each month. The calculation will 
then be as follows — 



Sales 



-January, 3,200 


X 


350 (days to 31 


St Dec.) 


1,120,000 


February, 4,100 


X 


319 , 






1,307,900 


March, 5,000 


X 


291 , 






. 1,455,000 


April, 4,800 


X 


260 , 






1,248.000 


May, 6,200 


X 


230 , 






1.426,000 


June, 2,300 


X 


199 , 






457,700 


July, 2,600 


X 


169 , 






439,400 


August, 1,800 


X 


138 , 






248,400 


September, 4,200 


X 


107 , 






449,400 


October, 5,200 


X 


77 , 






400,400 


November, 6,000 


X 


46 , 






276,000 


December, 6,300 


X 


16 , 






100.800 


51,700 






8,929,000 



8,929,000 divided by 51,700 gives approximately 173. 

173 days from 31st December is 11th July, average due date. 



Royalties and Minimum Rents. 

The treatment in accounts of royalties and minimum or dead 
rents frequently arises for consideration in connection with Colliery 
and Mining Companies. The provisions of the lease of the coal 



276 



ACCOUNTING 



or mine-field in such cases commonly provide for a royalty propor- 
tionate to the minerals worked, and also for a fixed minimum, 
which to some extent ensures that the property will be adequately 
exploited. 

Inasmuch as companies of this character cannot arrive at full 
production in the earlier stages of development, during which period 
the obligation to pay the minimum rent will apply, the terms of the 
lease usually give a permission to the lessee to recoup Short Work- 
ings, that is, to recover the excess of rent paid over actual royalties 
incurred, within a specified or unlimited period, from future 
royalties. 

Where there exists a reasonable probability of recoupment, there 
is no objection to the treatment of Short Workings in the accounts 
as expenditure paid in advance, but when it appears that these 
cannot or are unlikely to be recovered by deduction from sub- 
sequent royalties they represent a loss, and should therefore be 
written off. There is, again, a clear distinction between the 
minimum rents paid year by year in respect of property of which 
the development is not in immediate contemplation, and which 
are paid rather to maintain a monopoly over a certain area, and 
those paid by a concern in the initial stages of development. 

Example. A colliery holds a lease of lands upon the following 
terms inter alia — 

Minimum rent, £300 per annum, merging in a royalty of 6d. 
per ton ; Short Workings recoverable within five years. 

Tonnage raised for successive years is — 



1914 
1915 
1916 
1917 
1918 
1919 



2,000 tons 

8,600 
15,100 
16,800 
19,000 
14,200 



MINIMUM RENT ACCOUNT. 



Dr. 
















Cr. 






f, s. 


d. 






1 


s. 


d. 


1914. 


To Landlord . 


300 


- 


- 


1914. 


By Royalties A/c 


50 






1915. 


„ „ . . 


300 


_ 


— 


1915. 




215 


_ 


_ 


1916. 


„ „ . . 


300 


_ 


_ 


1916. 


.. ,. „ 


377 


10 


_ 


1917. 




300 


~ 


~ 


1917. 
1918. 


I ',', ',', '. 


420 
137 


10 


z 




1,200 


^ 


^z^ 


1,200 


^ 


__ 



MISCELLANEOUS 



277 



ROYALTIES ACCOUNT. 



D 
















Cr 


1914. 


To Minim, Rent A/c 

'', Landlord" . " . 
„ Landlord . 


J 


- 


d. 


1914. 
1915. 
1916. 
1917. 

1918. 
1919. 


By Profit & Loss A/c 


£ 
50 


s. 


d. 


1915. 


215 
377 


10 


— 


215 


- 


- 


1916. 


3,7 


10 


- 


1917. 


420 




420 


- 


- 


1918. 


137 

337 


10 
10 


- 


475 


- 


- 


1919. 


355 


^ 


- 


355 


^ 


, 



LANDLORD. 



1914. 


To Cash . 


300 


s. 


d. 


1914. 
1915. 
1916. 
1917. 
1918. 
1919. 


By Minim. Rent A/c 
„ Royalties A/c 


300 


s. 


d. 


1915. 


300 


- 


- 


300 




- 


1916. 


300 


- 


- 


300 


- 


- 


1917. 


300 


- 


- 


300 


- 


- 


1918. 


337 


10 


- 


337 


10 


- 


1919. 


355 


KKB 


<=s= 


355 


CDaa. 


as3» 



Valuation of Goodwill. 

The value of goodwill may have to be ascertained upon — 

(1) Purchase or sale of a business ; 

(2) The adjustment as between partners of the share due to 
a deceased or outgoing partner ; 

(3) Disturbance of a business by a local or other authority acting 
under compulsory powers ; 

(4) A claim for compensation for loss of earning power resulting 
from accident ; 

and in other less frequent cases. 

The factors involved in calculation of value naturally include the 
amount and nature of the profits and the number of years purchase. 
The latter varies greatly with circumstances, from a nominal figure 
to as much as five years. 

While the value is a matter of bargain and may, indeed, not be 
represented by a specific figure, but enter into and form part of 
a transaction involving transfer of numerous assets, the price is 
obviously dependent upon the probability of continuance of value 
to the purchaser. In estimating this probability, many factors 



278 ACCOUNTING 

may require consideration, e.g., locality (as regards, say, a 
theatre), terms of lease (where retention of premises is desirable), 
personality (in the case, say, of a medical specialist), reputation 
(in the case, say, of a firm of consulting engineers), connection 
(as regards, say, a patented article) ; any one or more of these 
may have influence in determining value in a particular case. Their 
influence will have effect upon the number of years' purchase to 
be paid, but obviously the main consideration is the financial 
results forming the reason for such value as exists. 

Assuming that accounts submitted are in themselves accurate, 
it may yet be for consideration how far they may be taken as a 
guide for future earnings. Thus, adjustment would ordinarily 
be necessary in respect of abnormal profits or losses, such, for 
example, as profit on investments made by a trading concern, or 
resulting from speculative transactions in markets outside the 
regular course of business. 

Assuming that such matters are correctly dealt with, the pur- 
chaser, in deciding upon a figure which he is prepared to pay, will 
naturally make allowance from the profits to which he hopes to 
succeed for interest on the sum to be invested in purchase of good- 
will ; for this interest represents income presently receivable, and 
he will pay to acquire only that further speculative return above 
what he now derives from other investments. It must not be 
supposed that a purchaser does, in the majority of cases, resolve 
the elements of the transaction into the theoretical factors indicated, 
but these nevertheless do substantially enter into the transaction. 

In addition to capital invested in purchase of goodwill, the 
purchaser will require to employ working capital, and will expect 
that the profits will compensate him for the interest thereon. The 
purchaser, therefore, should not base his price upon the full profits, 
but upon the balance remaining after deduction of interest on 
capital diverted from other investments. 

Should the business require personal attention from the owner, 
it is to be presumed that he, by diverting them from other objects, 
has contributed to the business the value of his services (otherwise 
producing income). For this, further allowance will be necessary, 
for the purchaser will not expend capital to acquire a right to the 
value of his own services. 

Thus, if the profits be assumed to appear as follows, after all 



MISCELLANEOUS 279 

adjustments other than those shown have been made, the method 
of calculation of the purchase price will be as now shown — 

1915. 1916. 1917. 



Profits 

Less, Management Salary (say) . 


i 
3,160 
300 


i 
3.500 
300 


i 
3.925 
300 


Less, Interest on Average Working 
Capital, at 5% per annum . 


2.860 
1.000 


3,200 
840 


3.625 
920 




1,860 


2.360 


2.705 

2.360 

— -1.860 

3)6,925 


Average 


. 


. ;^2,308 



Assume, further, that the purchaser has agreed to offer, or is 
prepared to give, four years' purchase — 

i s. d. 

Average profits ..... 2,308 - - 
Less, Interest on ;^7,693 6s. 8d. @ 5 % 

per annum ..... 384 13 4 

Balance .... 1.923 6 8 



At four years' purchase, value of goodwill is ;f7,693 6s. 8d., 
representing a further investment of capital over and above working 
capital to this extent, in respect of which an allowance for interest 
has been duly made. 

While the method of valuation on principles of theoretical accu- 
racy has been indicated, it should be emphasised that this exactness 
may be found in practice to have degenerated into a matter of 
bargaining in respect of approximate values, from which theory is 
notably absent. 



INDEX 



Absorptions and Amalgamations 

(Company Accounts), 156 
Accounting Records, 11 
Acquirement of Wagons by Hire 

Purchase, 267 
Adjustment Accounts, 48 
Adjustments, 2 
Agent, Accounts of, 65 
Allotment of Shares, 136 
Analysis of Books, 34, 48 
Annual Return, 152 
Annuity Method, 252 
Application and Allotment of Shares, 

142 
Apportionment between Capital and 

Income, 119 
Apportionments, 119 
Assets, Fixed, 5 

, Floating, 5 

Average Due Date, 274 

Balance Sheet, 2, 3 

, Double Account, 236 

-, Forms of, 6 

-, Single Account, 235 

, Statement of Items in, 

7 

Bank Account, 16 

Bankruptcy, 168 

■ , Statement of Affairs in, 168 

Books, Branch, 85 

Bought Ledger Payments Book, 55 

Branch Accounts, 84 

Books, 85 

Remittances, 97 

Branches and Head Office, Incorpo- 
ration of Final Accounts, 86 

, Foreign, 95 

, Difference in Exchange, 

101 

Building Society's Cash Book, 62 

Capital and Income, Apportionment 
between, 119 

Expenditure, 4 

, Reduction of, 154 

, Share, 136 

Card System. 17 

Ledgers, 25 

Cash Book, 13, 16 

with Bank Columns, 16 



Cash Book, Analysis, 51, 62 

, Branch Accounts, 90 

, Tabular, 62 

Sales Book, 14 

Circulating Assets, 5 
Company Accounts, 131 

, Statement of Affairs of, 183 

Consignment Accounts, Inwards, 72 

, Outwards, 70 

Consignments Journal, 73 
Control Accounts, 93 
Conversion to Double Entry, 37 
Cost Accounts, 204 

, Classes of, 205 

, Objects of, 204 

Ledger, 214 

Sheet, Colliery, 207 

Crates, 47 

Creditors' Ledger, 32 
Customers' Cash Book, 14 

Debentures, Redemption of, 261 
Debtors' Ledger, 32 
Deferred Interest Problems, 267 
Deficiency Account, 168, 182, 202 
Departmental Accounts, 9, 77 
Depreciation, 248 

, Annuity Method, 252 

, Diminishing Balance Method, 

251 

Fund, 250 

, Sinking Fund, 252 

, Straight-line Method, 250 

Direct Manufacturing Cost, 209 

Oncost, 209 

Discount on Debentures, 263 
Dissolution of Partnership, 109 
Dividends, 152 

Double Account Balance Sheet, 236 
Double Account System, 6, 234 
Double Entry, Advantages of, 1 

Information given by, 1 

Uses of, 1 
Due Date, 274 

Equation of Payments, 274 
Estate Duty Account, 115 
Executor's Books of Account, 117 
Executorship Accounts, 114 



Fixed Assets. 5. 248 



281 



282 



INDEX 



Floating Assets, 5, 248 
Foreign Branches, 95 
Forfeited Shares, 151 

, Re-issue of, 151 

Form E, 163 

Garner v. Murray, 109 
General Cash Book, 16 

Ledger Adjustment Account, 50 

Goods on approval, 45 

on Sale or Return, 45 

Goodwill, 105, 277 
. Valuation of. 277 



Head Office Current Account, 
Hire Purchase, 267 
Hotel Accounts. 58 



84 



Imprest System of Petty Cash, 15 
Indirect Manufacturing Cost, 209 

Oncost 209 

Instalment-Payment Purchases, 267 
Insurance, 83 

Investment of Reserve Fund, 258 

Journal, 12 

Ledger, 17 

, Card, 25 

, Loose Leaf, 26 

. Slip, 24 

Life Assurance Accounts, 234 
Loose Leaf Ledgers, 26 

Machine Costs, 219 
Manufacturing Account, 9 

Cost, 209 

Mineral Royalty, 274 
Minimum Rent, 274 
Multiple Cost Accounts, 205 

Oncost, 209 

Operating Cost Accounts, 206 

Packing Materials, 47 

Partners, 102 

Partnership Accounts, 102 

, Dissolution of, 109 

, Distribution of Assets on Dis- 
solution of, 109 

, Goodwill in, 105 

Petty Cash Book, 13, 15 

, Imprest System of Keep- 
ing, 14, 15 

Plant Ledger, 255 

Probate Values System, 116 

Process Cost Accounts, 206 

. Stocks. 42 



Profit and Loss Account, 2 

Prior to Incorporation, 147 

Purchases Journal, 89 

Raw Materials, 41 

Receipts and Payments Account, 9 

Reduction of Capital, 154 

Register of Plant and Machinery, 254 

Rent, Rates, etc., 80 

Rents, Minimum, 274 

Reserve, 257 

Funds, 257 

, Investment of, 258 

Return, Annual, 152 
Revenue Account, 8 

under Double Account 

System, 234 

Expenditure, 4 

Royalties, 274 

Sales, Analysis of, 57 

Day Book. 50 

Dissection Book, 53 

Ledger Adjustment Account, 49 

Share Capital, 136 

Ledger, 142 

Shares, Allotment of, 136 
Short- Workings, 276 

Single Account Balance Sheet, 235 
Single Account System, 6, 234 

Cost Accounts, 205 

Entry, 28 

, Conversion to Double 

Entry, 28 
Sinking Fund. 252, 257, 259 
, Difference between Re- 
serve Fund and, 257 

, How provided, 259 

, Investment of, 259 

, Treatment in Books, 259 

Slip Cash Book, 23 

Day Books, 21 

Ledger, 24 

System, 17 

Statement in Form of Balance Sheet, 
164 

of Affairs, 168, 183 

Statutory Meeting, 131 

Report, 131 

Stock and Stores Accounts, 38 
Stores Accounts, 38 

Ledger, 41, 210 

Requisition, 41 

Straight-line Method of Depreciation 

250 
Subsidiary Books, 13 

Tabular Book-keeping, 58 



INDEX 



283 



Tabular Cash Book for Hotel, 59 

Day Book for Hotel, 59 

Terminable Assets, 6 
Terminal Cost Accounts, 206, 216 
Trade Payments Book, 14, 61 
Trial Balance, 2, 35 

, Adjustment of, 2 

, Form of, 36 

Underwriting, 149 

Valuation Balance Sheet, 235 



Valuation of Goodwill, 277 

Wages. 211 

, Analysis of, 80 

Wagons acquired by Hire Purchase, 

267 
by Instalment Purchase, 

267 
Wasting Assets, 6 
Wear and Tear, 248 
Will. 124 



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SHIPPING 

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THE EXPORTER'S HANDBOOK AND GLOSSARY. By F. M. Dudeney. 

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FOREIGN EXCHANGE, A PRIMER OF. By the same Author. In crown 

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BANK ORGANISATION, MANAGEMENT, AND ACCOUNTS. By J. F. 

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Act, Bills of Exchange (Crossed Cheques) Act, 1906, and the Bills of 

Exchange (Time of Noting) Act, 1917. By J. A. Slater, B.A., LL.B. 

Lond.), Barrister-at'Law. Third Edition. In demy 8vo, cloth gilt, 

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BANKERS' SECURITIES AGAINST ADVANCES. By Lawrence A. Fogg, 

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BANKERS' ADVANCES. By F. R. Stead. Edited by Sir John Paget, 

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THE EVOLUTION OP THE MONEY MARKET (1385-1915). An Historical 

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Centralised, Co-ordinated Force. By Ellis T. Powell. LL.B. (Lond.), 

D.Sc. (Econ., Lond.), Barrister-at-Law. In demy 8vo, cloth gilt, 748 pp., 

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SIMPLE INTEREST TABLES. By Sir Wm. Schooling, K.B.E. IncrownSvo. 

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TALKS ON BANKING TO BANK CLERKS^ By HAROLrf E. Evans, 

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DICTIONARY OF BANKING. A Complete Encyclopaedia of Banking Law 

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SECRETARIAL WORK 

THE COMPANY SECRETARY'S VADE MECUM. Edited by Philip Tovey, 
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SECRETARY'S HANDBOOK. A Practical Guide to the Work and Duties 
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with Secretarial work in general. Edited by H. E. Blain. In demy 8vo, 
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GUIDE FOR THE COMPANY SECRETARY. A Practical Manual and Work 
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COMPANY ACCOUNTS. By the same Author. (See p. 1.) 



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THE TRANSFER OF STOCKS, SHARES, AND OTHER MARKETABLE 
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In demy 8vo, cloth gilt. 220 pp., 6s. net. 

THE CHAIRMAN'S MANUAL. Being a guide to the management of meet- 
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Palin, Barrister-at-Law. and Ernest Martin, F.C.I.S. In crown 8vo, 
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HOW TO TAKE MINUTES. Edited by Ernest Martin, F.C.I.S. Second 
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WHAT IS THE VALUE OF A SHARE ? Tables for readily and correctly 
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PROSPECTUSES: HOW TO READ AND UNDERSTAND THEM. By 
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INCOME TAX 

INCOME TAX AND SUPER-TAX PRACTICE. Including a Dictionary of 
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INCOME TAX AND SUPER-TAX LAW AND CASES, including the 
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COAL MINES EXCESS PAYMENTS, Guarantee Payments and Levies for 
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EXCESS PROFITS (Including Excess Mineral Rights) DUTY, and Levies 
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THE HISTORY AND ECONOMICS OF TRANSPORT. By Adam W. 
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THE ECONOMICS Ot TELEGRAPHS AND TELEPHONES. By John Lee, 
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INDUSTRY AND FINANCE. (Supplementary Volume.) Edited by Adam 
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the British Association, and bringing the information as to the replacement 
of men by women in industry, and that regarding currency, finance, 
banking, etc., up to date. In demy 8vo, cloth, 5s. net. 

TALKS WITH WORKERS. On Wealth, Wages and Production. In crown 
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ADVERTISING AND SALESMANSHIP 



THE CRAFT OF SILENT SALESMANSHIP. A Guide to Advertisement 
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Construction. By C. Maxwell Tregurtha and J. W. Frings. Size, 
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THE' NEW BUSINESS. A Handbook dealing with the Principles of Adver- 



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SALESMANSHIP. By W. A. Corbion and G. E. Grimsdale. In crown 

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PRACTICAL SALESMANSHIP. By N. C. Fowler. Junr. In crown 8vo. 

337 pp. , 58. net. 
COMMERCIAL TRAVELLING. By Albert E. Bull. In crown Svo, cloth 

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THEORY AND PRACTICE OF ADVERTISING. By W. Dill Scott, Ph.D. 

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THE PRINCIPLES OF ADVERTISING ARRANGEMENT. By F. A. Parsons, 

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COMPANY CASE LAW. By F. D. Head. B.A. (Oxon.), Barrister-at-Law. 
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INCOME TAX AND SUPER-TAX LAW AND CASES. (See p. 5.) 

THE LAW RELATING TO SECRET COMMISSIONS AND BRIBES (Christ 
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BANKRUPTCY, DEEDS OF ARRANGEMENT, AND BILLS OF SALE. By 
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PRINCIPLES OF MARINE LAW. By Lawrence Duckworth, Barrister- 
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GUIDE TO THE LAW OF LICENSING. The Handbook for all Licence- 
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RAILWAY (REBATES) CASE LAW. By Geo. B. Lissenden. In demy 
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THE LAW RELATING TO THE CHILD: It8 Protection, Education, and 
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GUIDE TO THE REGISTRATION OF BUSINESS NAMES ACT, 1916. By 
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CONVEYANCING. By E. A. Cope. In crown 8vo, cloth, 206 pp.. 3s. 6d. net. 

WILLS, EXECUTORS, AND TRUSTEES. By J. A. Slater, B.A., LL.B. 
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INHABITED HOUSE DUTY. ^By W. E. Snelling. In demy 8vo, cloth 
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BUSINESS MAN'S GUIDE. Seventh Revised Edition. With French, German. 
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C0M3IERCIAL ARBITRATIONS. By E. J. Parry, B.Sc, F. C , F.C.S. 
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PERSONAL EFFICIENCY IN BUSINESS. By E. E. Purington. In crown 
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DICTIONARY OF COMMERCIAL CORRESPONDENCE IN SE^ "^ LAN- 
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FILING SYSTE3IS. (See page 2.) 

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A MANUAL OF DUPLICATING METHODS. By W. Desboro igh. In 
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